Stocks

Shuttered brokerages hit retail investors badly

PALAK SHAH Mumbai | Updated on July 15, 2021

Many declared defaulters for misusing client funds, securities

Thousands of retail investors have been left high and dry with over two dozen stockbroking firms told to shut shop after being categorised as defaulters for misusing client funds and securities. The retail investors will have to fight a legal battle to reclaim their money and this can take time.

Despite market regulator SEBI taking several actions recently, such as changing rules pertaining to the power of attorney (PoA), margin collection, pledging and re-pledging of client securities, and ring-fencing client funds, brokers continue to default.

Latest defaulter

Telangana-based Stampede Capital is the latest to be expelled. The NSE had approved Stempede’s algo-trading platform in July 2014, but six years later, it issued a show-cause notice to the broker for misuse of client funds.

BMA Wealth Kreators, Allied Financial Services, Fairwealth Securities, IL&FS Securities, Amrapali Aadya Trading & Investments, Kassa Finvest, Unicorn, Vasanti Securities, Click-2-Trade, Anugrah, Arcadia, and IndiaNivesh are some of the other brokers facing complaints of default or misuse of clients’ securities. Many have been declared defaulters, but a few are still under the scanner or on the list of potential defaulters, sources said.

Karvy was the largest stockbroker catering to retail clients to be declared a defaulter by the NSE last year. It took nearly a year for the exchange to declare Karvy a defaulter after it came to light in 2019 that it had misused clients’ securities worth nearly ₹2,000 crore using the Power of Attorney it had obtained.

The big worry, according to regulatory experts, is that claims against defaulting brokers could far exceed the investor protection fund maintained (IPF) by the NSE and the BSE. In November last year, SEBI had mandated that exchanges increase their IPF to ₹1,500 crore. Even this enhanced corpus may not be enough to fully reimburse all clients as the default by brokers in the derivative segment is higher, experts say. Also, exchanges have imposed a cap on what each investor can claim. Clients can go to exchanges with their claim only after a broker is declared a defaulter.

The delay in declaring brokers as defaulters leaves client claims in limbo. No precise figure of default or the number of clients affected has been put out either by SEBI or the exchanges so far.

 

Operation needs study

“The modus osperandi of the brokers on how they whip up the frenzy and run away with client money needs to be studied. SEBI has done some work and come up with new rules. Still, 100 per cent return of client money should be paramount and brokers and even those inspecting them should follow the rules. The regulator needs to do more,” said Shriram Subramanian, an expert on corporate governance and investor protection issues.

“SEBI has taken some corrective steps but time will tell its effectiveness,” said J N Gupta, a former SEBI official and an investor rights advisor.

SEBI has been blamed for being slow in investigating funds diversion by brokers and holding exchanges responsible for regulatory lapses and timely settlement of default claims. Separation of funds at the exchange (clearing and settlement) level has been mooted. Lawyers suggest that clients form a group and move the Securities and Appellate Tribunal against exchanges taking unusually long to declare brokers defaulters.

Published on July 14, 2021

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