A stock broker is also known as the Broker in the financial market terms. They are the intermediaries who facilitate the securities’ buying and selling for the traders/investors. These intermediaries connect the investors to the exchange as investors cannot trade directly. Let us discuss what happens if your stock broker goes bust in India.
There are different stock brokers such as Full-service stock brokers, discount brokers, and online brokers.
Stock brokers cannot take your money even if the broking firm goes bust. His asset management and research get banned initially, and then the other legal steps are taken up by the security exchange board of India (SEBI). This implies the Investor’s funds are safe.
Stock brokers are the mediators or a connecting chain between investors and the exchange. They don’t have any direct access to investors’ funds, which implies they cannot withdraw money from the investors and run.
If your stock broker goes bust, your funds are safe. This article will cover the adverse situations of a stock broker going bust and how you can claim your funds back.
What happens to your Shares/Stocks if Stock Broker goes Bust?
A demat account holds the funds in dematerialized form, i.e., a Demat account holds the shares and other securities in digital format. The Demat account is under the depositories known as central depository services CDSL and National Securities Depository NSDL. The Indian Government Ministry of Finance creates these securities. This means your stocks are not residing with the brokerage or the individual Broker. As mentioned above, they are a platform from which you can connect to the exchange. They do the trade as per the instructions given by the client, which is to sell, hold, and buy shares.
What are the steps to follow of the Broker Shut down:
If your Stock Broker goes bust, here are the key points you need to follow to claim and secure your funds.
It is important to note that the shares are safe under CDSL and NSDL. In short, your data is safe electronically in your Demat account.
The one thing you need to focus on is the trading account. A trading account is an account that holds the money for the transaction and is used by the Broker to carry forward your transactions as instructed.
If your stock broker goes bust here are the steps to follow:
● You need to file an Investor Protection Fund (IFC) with SEBI.
● This will help you provide compensation for the same.
● You can file this claim compensation with SEBI within 3 years as per the rules to be eligible for the payment.
These are the steps you need to follow if your Stock Broker Goes Bust in India.
Here are the pointers which conclude the article. These are the key pointers to keep in mind if your stock broker goes bust –
● All your stocks and shares are safe in electronic form with the depositories, and brokers cannot access them.
● These stocks or shares reside safely with the depositories that are NSDL and CDSL.
● If you have invested in mutual funds, your investments are safe with the AMC’s i.e, Asset Management companies.
● No broker (individual or firm) can operate your trading account without your permission and instructions, and they cannot use your funds for their purposes.
● If the Broker shuts down, you need to apply for the Investor Protection Funds (IFC) managed by SEBI. This is to claim your compensation for the same, and you need to use it within 3 years to be eligible for the payment.
Frequently asked Questions
1. What are the reasons behind broker shutdowns?
A broker can be a defaulter because of many reasons. Some of them are listed below:
● Carry forwarding the transactions without the permission of the account holder.
● Not transferring of the funds in the shareholder account
● Using the investors’ money for their personal use.
2. What steps is SEBI taken to make a broking firm reliable?
SEBI takes many steps to ensure the safety of investors’ funds and investments. They have implemented rules on the brokers such as:
● There are high entrance fees charged from a broking firm. This is done to ensure that no one can open a broking firm in a short span. Moreover, this will provide fewer brokers so that the investors aren’t confused.
● Every trade done on the platform goes through the account holder’s permission. This is ensured by a pin given to the account holder. This way only account holders can allow transactions.
● Brokers have to provide records to the clients if asked for the same. They have to maintain the data. This data helps point out any fraud, and investors can complain directly to SEBI.
3. What if a stock broker goes Bankrupt?
If your brokerage firm goes bankrupt, there are possible chances of losing some of your stocks. This can be due to the failure to follow established protocols, resulting in shares of your store under the firm going missing.
4. Which stock brokers are safe in India?
Brokers approved by SEBI are safe and reliable because they follow SEBI guidelines. Here is the list of the stock brokers who are reliable and safe as they are SEBI-approved stock brokers.
● ZERODHA BROKING LIMITED
● RKSV SECURITIES INDIA PRIVATE LIMITED (Upstox)
● ANGEL BROKING LIMITED
● NEXTBILLION TECHNOLOGY PRIVATE LIMITED (Groww)
● ICICI SECURITIES LIMITED
● 5PAISA CAPITAL LIMITED
● KOTAK SECURITIES LTD.
● HDFC SECURITIES LTD.
● IIFL SECURITIES LIMITED
● MOTILAL OSWAL FINANCIAL SERVICES LIMITED
● SHAREKHAN LTD.
● AXIS SECURITIES LIMITED
● SBICAP SECURITIES LIMITED
● PAYTM MONEY LTD.
● GEOJIT FINANCIAL SERVICES LIMITED
5. Can a stock broker steal your money?
SEBI registered best stock brokers can not transfer the funds from their bank account to execute a trade or transaction with another broker. Also, they cannot transfer stocks for off-market trades. Moreover, they can’t merge the balance from other accounts to nullify debt into different accounts.