AS YOU navigate the choppy waters of equity investing, you tend to rely on your broker as a safety line to keep you afloat. He buys and sells shares on your behalf. Even more important, and maybe not so happily, you often end up relying on his advice to make a killing in the market. You assume that he’s your eyes and ears at the market. Which is why, when one day he decides to play fast and loose with you, you are hit real hard.

But how do you know when your broker is setting you up for the kill? Are there any warning signs? As with any long-term relationship, make sure you have sorted out troublesome issues before you sign on the dotted line. We list here 10 potential problem areas–and prescribe some due diligence for your safety.

The agreement. The client-broker agreement should mention the broker’s Sebi registration number and incorporate the basic terms and conditions for all transactions. It should specify that the exchange’s rules and regulations apply to you and your broker. Signing the agreement ensures that the broker delivers shares or makes payments for sales within 24 hours of settlement.

Some brokers slip in clauses that dilute these obligations. For instance, your broker might add a line that puts the onus on you to ask for funds due from sales. If you are an average investor who does not need a running account, remove this clause; the broker should automatically transfer funds and shares to you after every transaction. This is mandatory under stock exchange regulations. Look for a new broker if you are forced to accept such a clause.

Ask your broker for a copy of the agreement. Given that the broker is a member of the exchange, the exchange should be able to direct him to provide a copy to clients but it doesn’t, and the fact remains that brokers don’t provide a copy unless you specifically ask for one.

Offline or online? It is to your advantage if the broker provides an online platform but ensure that it’s not at the cost of the offline model, as you can never tell when Net connections will fail. Over 100 NSE brokers have independent exchange-approved trading websites and over 100 BSE brokers useWebEx, the BSE’s centralised Internet trading platform.

The advantage of an online system is that you can execute trades yourself, move funds electronically, see past transactions and generally get more transparency. If you prefer telephonic orders, or if the Net connection is down, ensure the broker has a dealing office or branch in your city.

Contract note. The contract note is the next most important document. You are supposed to receive a contract note every day you trade, specifying details of the order, trade, brokerage fee, settlement number and other exchange-specified information. Regulations require brokers to send the contract note within 24 hours of the trades.

Some online brokers give you the choice of digitally signed contract notes via e-mail. If you trade online, it makes sense to have contract notes in electronic form too. For taxation or other purposes, you can take prints of the digital notes, which is legally valid. Some brokers give clients incentives for opting for digital contract notes. SaysC.J. George of Geojit Financial Services, an NSE and BSE broker: "For low brokerage transactions, we charge a minimum brokerage of Rs 20 for clients receiving digital contracts and Rs 30 for others."

Settlement obligations. In the present T+2 rolling trading cycle, where your trade is settled on the morning of the third day, your broker expects you to pay or deliver shares by the next day. Some even ask for funds or shares in advance.

This is a problem because the settlement guarantee from the NSE and BSE comes into effect only after an order has been executed. (If the broker defaults after order execution, the exchange immediately settles your claim.) But if your broker defaults during the gap between when he took advance funds or shares from you and the time your order was executed, you are in trouble. This is also true if you keep a running account with your broker.

Remember the Home Trade fiasco? Investors had to transfer money or shares to Home Trade before they bought or sold throughwww.hometrade.com, and lost that money when the portal went bust. They could only file complaints with the NSE and the BSE and go for the exchange-prescribed arbitration.

Sebi wants to move to T+1 rolling settlements, and that’s bound to make matters worse. You will have no choice but to make advance payments and deliveries. Neither Sebi nor the exchanges have given a thought to how to offer better legal protection to your pre-trade payments and deliveries in the shorter settlement cycle.

Power of attorney. It’s a pretty routine form, and brokers say they need to be able to get your shares or funds on time. But avoid giving your broker a blanket power of attorney, as this will allow him to run your demat account and sign delivery instruction slips on your behalf. Sign a power of attorney that applies only to trades done through your broker and ask for a specificno-authorisation clause for off-market trades. Keep a close watch on your demat account.

Settlement obligations. In a perfect world, your broker will honour his obligations in advance. But in the real world, ensure your broker makes payments or delivers shares within 24 hours of the settlement payout (which happens on the afternoon of the third day of your trade).

Says Geojit’s George: "We make payments within hours of settlement if clients have accounts in the same bank in which we have our clearing account." Check if it’s convenient for you to do such a thing. The long-term solution is for RBI’s clearing across banks to get automated and real-time, which is what its ongoing RTGS (real-time gross settlement) project is endeavouring to do.

Branches or franchisees. The recurring bull runs have made brokers expand fast and wide. Often, branches are actually franchisees registered as sub-brokers. If you are dealing with a sub-broker/franchisee, check that the main broker’s name is on the contract note. Similarly, make cheques and delivery instruction slips in the name of the main broker. After settlement, ensure the payment or delivery by your sub-broker is from the account of the main broker. And, as George says, insist on a receipt in your name whenever you make a transaction.

On July 6, the NSE issued a rare circular to its brokers asking them to undertake appropriate due diligence of extended trading centres manned by sub-brokers, authorised persons or their own officials. The circular clearly issues a warning to brokers to ensure that their extended trading centres do not indulge in activities like "unregistered broking, off-market deals and handling funds and shares otherwise than directly to or from the trading members’ accounts."

Transaction statements. Exchange regulations state that brokers must send you, apart from contract notes, a quarterly transaction statement within one month of the end of every quarter. This is important as it gives you a complete overview of your trades, payments made or received, and shares delivered or received, during the quarter. Ensure that you receive this unfailingly. Many online brokers provide you with a daily transaction statement as well.

Broker-cum-DP? Many brokers are also members of NSDL (National Securities Depository) or CDSL (Central Depository Services) and therefore offer you the option of having a demat account as well. While this is not necessarily better than having a demat account with a bank DP, it does offer you certain advantages. Mostbroker-DPs offer you a concession on the annual maintenance charge on your demat account if your trading account is also there. Moreover, you can also move shares to and from your broker a tad faster since his clearing demat account is with his own DP.

Financial soundness. Though exchanges require brokers to have a minimum financial net worth, run some checks yourself. Find out if the broker is a public or private company under the Companies Act. If it is a public company, ask for the annual reports and take a good look at the company’s financials (including net worth). If it is a private company, all we can say is: be careful.

There’s nothing better than constant vigilance, but don’t hesitate to lodge a formal complaint with the stock exchange if you experience any service deficiencies. Happy, and safe,investing.