What happens to your shares when a stockbroker goes bust in India? Will you lose all the money you have invested through them? Well, the good news is that your capital or funds are still safe. The Securities and Exchange Board of India (SEBI) has laid guidelines for such circumstances. In this article, we will discuss what will happen to your share if your stockbroker closes and what are your options for redressal. Keep reading to find out!

Who are Stockbrokers?

Stockbrokers are also known as brokers in the financial markets. They act as an intermediary who has the authority to buy and sell stocks and securities on the investor’s behalf. Usually, stocks are traded through exchanges. To buy a stock or sell a stock through exchanges, you need an intermediary who will help you with the transaction.

Most stockbrokers work for a brokerage firm and handle transactions for several individual and institutional customers. There are different types of brokers in the market. The most common type is the Full-service stockbrokers. They offer a full stack of traditional services to their clients coupled with advisory services. Generally, fees charged by them are high.

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Parties Involved in a Stock Market Transaction

A stock market is a place where investors can trade in securities like stocks, bonds or derivatives among other assets. When an investor places a trade, multiple parties get involved to execute that transaction. Let us have a look at each of these parties and what role they play in facilitating the trade.

  1. The Regulator (SEBI)

Securities and Exchange Board of India (SEBI) is the regulator of stock markets in India. It ensures that securities markets in India work efficiently and transparently. It also protects the interests of all the participants and none gets any undue advantages. SEBI lays down regulatory frameworks were exchanges, companies, brokerages, and other participants have to abide by to protect investors’ interests. SEBI is in authority for the registration, control, and examination of the depositories. 

  1. Stock Exchange

Stock Exchanges offer a trading platform where buyers and sellers can carry out transactions in securities. In India, the major stock exchanges are National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). The shares issued by companies are first listed on these exchanges and are then available to the public for trading.

The trades are done through electronic trading terminals. Stock exchanges also appoint clearing and settlement agencies and clearing banks that manage the funds and securities settlements that arise out of these trades. 

  1. Depositories

Depositories are institutions that hold securities of investors in electronic form. The two major depositories in India are National Securities Depositories Ltd (NSDL) and Central Securities Depositories Ltd (CDSL). A depository gives security and liquidity in the market. They also provide services related to transactions in the securities held in dematerialized form.

Put in simple words, Securities in depository accounts are like cash in a bank account. Another important party is the Depository participants. They act as intermediaries between the investors/traders and the depository. Some of the depository participants of India include Angel Broking Limited, Axis Securities Limited, 5paisa capital limited, etc.

  1. Broker

Trading members or Stock Brokers are registered members of a Stock Exchange. They assist in the buy and sell transactions of investors on stock exchanges. All secondary market transactions on stock exchanges have to be basically conducted through registered brokers of the stock exchange.

Trading members can be individuals (sole proprietor), Partnership Firms or Corporate bodies, who are permitted to become members of recognized stock exchanges subject to completion of minimum practical needs. Brokers receive a commission for their services, which is called brokerage. Maximum brokerage chargeable to customers is fixed by individual stock exchanges.

  1. Clearing Banks

Clearing Bank acts as a significant mediator between clearing members and the clearing Corporation. Every clearing member needs to maintain an account with the clearing bank. It is the clearing member’s accountability to ascertain that the funds are available in its account with the clearing bank on the day of pay-in to meet the obligations arising out of trades executed on the stock exchange. In case of a pay-out, the clearing member receives the amount in their account with the clearing bank, on the pay-out day.

  1. Clearing Corporation

The Clearing Corporations play a vital role in protecting the interest of investors in the Securities Market. Clearing agencies ensure that members on the Stock Exchange meet their obligations to deliver funds or securities. These agencies act as a legal counterparty to all trades and guarantee settlement of all transactions on the Stock Exchanges. It can be a part of an exchange or a separate entity. 


What Happens to Your Shares When Stock Broker Goes Bust in India?

The first thing that should be noted is that the brokers are just intermediaries who execute your orders on your behalf. They do not have the authority to operate your trading account without your consent. In addition to that, they cannot use funds from your account unless specified. Since the brokers are registered members, their activities are monitored by the regulatory authority.  

The shares you own are held in electronic format with the depositories i.e, NSDL and CSDL.  In case the brokers go bust, your shares will be transferred to some other brokerage firm.  This means that the number of shares held by you shall remain unaffected.

The second thing an investor can do is to apply to the Investor Protection Funds (IPF) which is set up by SEBI, to provide compensation. All you have to do is claim compensation in time. If the claim is filed immediately, the trader is eligible to get compensation of up to Rs 15 lakhs. Post that the amount will be determined by the IPF. The trader has to file the claim within three years to be eligible for compensation.

Bankruptcy Cases in India

September 2008Kass Securities Pvt. Ltd
September 2008Himgiri Fincap Ltd.
July 2007Madan & Co. Ltd.
December 2004Alba Capital Markets P Ltd.

In Closing

Recently it has caught the attention of the regulators that some unregistered entities and unregulated internet-based platforms are targeting gullible investors with false promises of exorbitant returns on their investment schemes or products. 

For this both, NSE and BSE have issued separate statements urging people not to transfer funds or securities to stockbrokers under any agreement of assured returns. It is always important to make your own due diligence before investing.

That is all for the article on “what happens to your shares when stockbroker goes bust in India?”, Let us know if you found this article helpful in the comment section. Happy Reading!

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