Stock Broker Goes Bust or Turns Defaulter: How Investors Can Safeguard Their Equity Investments?

27 Nov 2020by Pradeep U

Stock Broker Goes Bust or Turns Defaulter: How Investors Can Safeguard Their Equity Investments?

Karvy Stock Broking Ltd. (KSBL) which once ranked among the top stock broking firms in India has been recently declared a defaulter by SEBI and expelled by both National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). The final order confirming the ban confirmed the ban on Karvy Stock Broking Ltd. (KSBL) from taking new clients comes after a year after passing an interim order, wherein it had imposed a ban on KSBL for misusing clients' securities.

National Stock Exchange of India Ltd (NSE) issued a circular on Monday informing that Karvy Stock Broking Ltd. has been expelled from exchange's membership and declared as a defaulter w.e.f. 23rd November 2020, after the closure of market.

What went wrong with Karvy Stock Broking?

As per the interim order issued by Sebi exactly a year ago in November 2019, the market regulator that said Karvy Stock Broking was misusing client securities by misusing the PoAs (power of attorney) given by its clients for pledging them with banks to secure loans facilities towards working capital. SEBI’s order also stated that Karvy Stock Broking had also sold some of the client securities and transferred the gains to its real estate arm. The total misuse of client securities was to the tune of ₹2,000 crore.

The entire episode has left a section of investors worried about such instances happening again with many investors asking questions like:

“How do I safeguard my equity investments?”

“What will happen to my investments if my stockbroker becomes bankrupt?”

With a pro-active SEBI implementing a variety of rules and regulations to safeguard the interests of investors, the potential for frauds has considerably reduced as compared to the past. However, as an investor it is your duty to be cautious as unscrupulous brokers may always find ways to exploit the loopholes in the system. Read more about the 1992 stock market scam here.

How investors can safeguard their equity investments?

  • Always update your mobile number and email ID with the depository.
  • Monitor each and every SMS or email statements sent by depository after every transaction in demat account. In case you notice any unauthorized debits or credits in your demat, contact your DP for clarification.
  • Ask your stock broker for a ledger balance and holding statements every 90 days.
  • Don’t keep excess money in your broking account. Transfer the money back to your bank account if you don’t intend to make any investments immediately.
  • Check your demat balance on a regular basis through NSDL/CDSL website or mobile application.

The steps mentioned above will help an investor to safeguard the equity investments to a great extent. However, the biggest question asked by investors is “What will happen to my investments if my stockbroker becomes bankrupt?”

Well, in a scenario where a stockbroker becomes bankrupt or shuts down business there is absolutely nothing for an investor to worry as the stocks owned by an investor are held in his demat account with the depository, CDSL or NSDL.

The greatest cause of concern for an investor however would be unutilized funds lying in his trading account at the time when a stock broker goes out of business. To address this problem, under a directive from SEBI, exchanges have setup an Investor Protection Fund (IPF). As on current date Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) have and IPF corpus of Rs. 784 crores and Rs. 594 crores respectively.

The SEBI model bye-laws on Investor Protection Fund states that “The IPF may provide compensation against a genuine & bonafide claim made by any client, who has either not received the securities bought from a trading member for which the payment has already been made by such client to the trading member thereagainst or has not received the payment for the securities sold and delivered to the trading member or has not received any amount or securities which is/are legitimately due to such client from the trading member, who is either declared a defaulter or expelled by the Exchange or where the trading member, through whom such client has dealt, is unable to get the securities rectified or replaced for the reason that the introducing trading member at the Exchange is either declared a defaulter or expelled by the Exchange, under the relevant Rules, Bye-laws and Regulations of the Exchange”.

So, in the scenario of a stockbroker going bankrupt or out of business, clients can claim money from stock exchanges once the broker is officially declared a defaulter subject to a maximum amount of Rs. 25 lakhs.

For protecting the interests of investors, Market regulator SEBI has put in place several safeguards like strict financial disclosures and regular audits for stockbrokers. However, those looking to circumvent the system for quick gains through frauds may always look for ways to do so.

As an investor always do your bit with regular reviews of your investment holdings/balances and timely complaints in case of any lapses. Remember “Caution is the mother of safety”.

 

 

 

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