Default claims against brokers on the rise

PALAK SHAH Mumbai | Updated on October 11, 2019 Published on October 11, 2019

Default claims worth several crores are piling up against brokers, as they are finding it increasingly difficult to cope with the volatility in the market. Fairwealth Securities and Kolkata-based equity broker BMA Wealth are two of the firms against whom default claims have been filed with the exchanges, sources told BusinessLine.

IL&FS Securities, Amrapali Aadya Trading and Investments, Kassa Finvest, Unicon, Vasanti Securities, Royal International, Click2Trade are some of the other brokers who have had complaints of defaults filed against them over the last few years. Some brokers in the list are also said to have diverted client funds to other ventures.

The trading terminals of Fairwealth Securities and BMA Wealth have been disabled by BSE and NSE. BMA was found to have misappropriated client money worth around Rs 100 crore, while the management of Fairwealth Securities has been inaccessible to regulators, and has failed to file its weekly compliance report.

No segregation of collateral

A few more brokers, currently under the scanner of exchanges and SEBI, could face action for misappropriation of client money and defaults, sources in the know said. A key loophole that allows brokers to play with client money is that there is no segregation of the collateral provided by clients to the broker.

Currently, there is no system in place for clearing corporations to distinguish between the assets of brokers and client collateral. The broker uses client money as collateral with the exchanges and takes derivative positions.

During the recent market volatility, when the Sensex and Nifty gained nearly 8 per cent in just two trading sessions after the corporate tax bonanza announced by the government and the subsequent fall, many brokers were hard-pressed to cope with volatility, especially when using client security as collateral, and it could be a key reason why a few more brokers could emerge as defaulters, market players say.

SEBI’s enhanced supervision norms has made it mandatory for brokers to file weekly and monthly reports detailing client securities and holding statements. Brokers are even supposed to settle client accounts every five days and cannot carry forward client securities under various accounts.

But there is no rule that requires brokers to say how much of the actual collateral is his own and how much belongs to the client, market experts said. It is one of the key loopholes that allows the broker to still use a client’s money as his own and even default.

Funds diversion

The now infamous IL&FS Securities fiasco, wherein the broker used client collateral to make good its own derivative loss positions, is a glaring example of such exploitation of client collateral with brokers, experts say. Client funds worth hundreds of crores remained locked-in by clearing corporations.

“We do not support brokers who are not fulfilling their fiduciary duty. Also, diversion of client funds from brokerages should be prohibited. There are strong reporting requirements in place for brokers currently,” said Vijay Bhushan, President, ANMI, India’s largest broker association.


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Published on October 11, 2019
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