Personal Finance

How to safeguard shares pledged with brokers

Lav Chaturvedi | Updated on February 17, 2020

Here are 10 caveats that help you protect assets pledged with brokers and DPs

A basic understanding of the nuances of risk-reward interplay of financial assets is extremely important, especially for first-time investors, to make wise investment decisions. Even more crucial is ensuring that investors remain cautious about whom they have entrusted their monies and securities with.

In the past year alone, there have been incidents which shook the confidence of investors and raised doubts about the safety of their investments with the market intermediaries on whom they placed their faith . Thankfully, the market regulator stepped in to initiate stringent action against these intermediaries by cancelling their broking licences for illegally pledging investors’ monies and securities.

Here are 10 caveats, particularly for new investors, which can help them to keep their investments safe and protect their financial assets pledged with their brokers and depository participants (DP):

Track all credits made by the broker: Investors need to ensure that the broker is crediting the securities to their demat accounts on the payout day even if they are not fully paid.

Read the PoA document thoroughly: The Power of Attorney (PoA) that investors provide their brokers with should only have clauses as directed by the regulatory authorities. These clauses are to enable the brokers to ensure seamless pay-in of securities for settlement purposes and/or to move the securities to designated accounts for pledging with the Clearing Corporation (CC) of exchanges for fulfilling the margin requirements. Investors should read the PoA document to ensure there are no additional clauses added that can enable their brokers to take advantage of their securities or funds in any other way.

Park all non-cash collaterals only in their DP accounts: Any upfront margins that investors may have provided through non-cash collaterals should be kept in their own DP accounts. They need to ensure that such collaterals aren’t moved out of their accounts.

Trade portal should display MTF collaterals: For any customer who has availed of the SEBI-prescribed ‘Margin Trading Funding’ (MTF) facility, securities pledged for it need to be clearly displayed as collateral along with the positions on the trading portal.

Ensure the broker is complying with the norms of moving surplus funds/securities: Brokers should always comply with the norms of moving surplus funds and securities lying with them in defined frequency at all points in time. Investors need to keep a track on whether the broker is adhering to this norm.

Ask for all statements during the payouts: At the time of payouts, investors should be provided with the fund’s ledger statement, securities ledger statement and retention statement. Investors should always ask their brokers for these statements during the payout.

Real-time notifications of all transactions: Investors should ensure they are notified of all the transactions that are done on a real-time basis by them or even through assisted channels such as call and trade and dealers.

Frequent logins into the trading account: Investors need to frequently login into their trading portals to have access to all reports such as the order book, trade book, demat holdings, demat transactions and funds ledger statements.

Choose the broker on the basis of track record, not pricing: Investors shouldn’t fall prey to pricing wars while choosing their brokers. Instead, they should go with a broker with at least a decade of established track record of efficiently and transparently managing customers and their portfolios in compliance with all regulatory norms and practices.

Evaluating the trust quotient: Brokers need to become partners on whom investors can completely place their trust for managing their financial wellness. If there is even an iota of doubt, investors should be prepared to replace their brokers.

The writer is CEO, Reliance Securities

Published on February 17, 2020

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