Rising broker defaults: How to claim your money

PALAK SHAH Mumbai | Updated on November 22, 2019

The Investor Protection Fund maintained by the exchanges are obliged to pay legitimate clients who can provide evidence

Defaults by brokers in India’s stock markets is on the rise. In a majority of cases, it has been found that distressed stock brokers who have lost heavily, often in the derivative segments, even offload client collateral to fulfill their obligation to the clearing corporation. The proceeds from the sale of client shares is not returned to the ultimate beneficiary.

The Allied Financial and IL&FS cases are the most recent examples of such practice. As of now, there is no segregation of client and broker collateral placed with the clearing corporation.

Even though regulatory action has been slow and ineffective in deterring brokers, there are ways by which retail and high net worth individuals can recover their dues from the Investor Protection Fund (IPF) maintained by the stock exchanges. However, it is important that exchanges speed up the procedure to declare brokers as defaulters, which would only benefit clients. But that is a slow process.

By putting pressure on the exchanges through legal means and by writing to them, the market regulator SEBI and even the Finance and the Corporate Affairs Ministries continuously, and by bringing the issue and the treatment of their complaints into the public domain can speed up the matter, as it builds a history of complaints and forces an inactive, bureaucratic work-force to move, experts say.

Lawyers also suggest that clients can form a group and move the Securities and Appellate Tribunal, if the exchanges take unusually long to declare a broker a defaulter. So far, around 12 brokers, who could have lakhs of clients, have been declared defaulters by exchanges since 2017.

Following are the criteria that need to be followed to claim money from the IPF in case of defaulting brokers. Claims can be made with the exchange where the trades were made. Clients can file their claim through any of these modes:

Use the complaints registration facility of the BSE and the NSE.

The claims are scrutinised by the exchanges and placed before the Member and Core Settlement Guarantee Fund Committee (MCSGFC) for recommendation to the IPF. It may be noted that only eligible claims are recommended for compensation from IPF, up to a maximum of Rs 15 lakh per defaulter member.

The eligibility of the claim is determined based on the policies laid down by the the respective exchanges, the BSE and NSE.

Complaints can be made via e-mail, by the submission of physical documents at any of the Investor Service Centres of BSE and NSE, and through SCORES.

The recommendation of the MCSGFC is communicated to the BSE IPF for approval or rejection of the claim.

Time taken for entire procedure

Claims processing and crystallisation is dependent on the submission of complete information/ documents by the client. Following the crystallisation of the eligible claim, the same is placed at the quarterly MCSGFC meeting. Post approval, the recommendation is sent to BSE IPF Trustees for their consideration. Disbursement is done post acceptance of the recommendation by the NSE, BSE IPF Trustees. The list of trustees is given on NSE and BSE websites.

When are brokers declared as defaulters

Whenever a stock broker fails to honour a financial obligation with respect to transactions undertaken on the exchange on behalf of their clients and the claims of such clients are crystallised through IGRC decision/ arbitration award/ appellate arbitration award, the exchange declares such stock brokers as defaulters, after following due process of law.

Further, if a stock broker is declared as a defaulter on another stock exchange, the stock broker is immediately declared as a defaulter in line with SEBI norms.

Published on November 22, 2019

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