The stockbroker works as the intermediary and connects the investor/trader with the dynamic stock trading market. They help traders and investors to keep their stock trading smooth by charging a small commission. That’s how a stockbroker earns money and provides long-term investment opportunities for the investors. Nowadays, all the share brokers claim to provide the best broking services and facilities required for efficient trading in the Indian share market.
But what happens if the stockbroker goes bust in India? In this situation, you are more likely to get cheated by the broker or cause massive loss if they get bankrupt or worse than it.
Here in this article, we will comprehensively understand this scenario. So, if you are a stock trader or investor in the stock market, stay connected with this essential article.
What is Stockbroker?
Stockbrokers or stock brokerage firms are those bodies that are licensed under the SEBI. And they are responsible for participating on behalf of the traders and investors in the share market. Interested people willing to invest their hard-earned money in the share market open their Demat account under the broker. Also, the investor allows them, brokers, to trade on behalf of them.
However, only licensed brokers and brokerage firms are eligible to act as an intermediary between investors and the stock market. Hence if you want to invest in the stock market, contact a licensed broker and keep a detailed eye on the trading statement and the broker’s behavior. It is because brokers often misuse the powers given by the trader or investor and take advantage of them. Thus, to avoid this kind of negative speculation, you need to check the broker’s background and identify whether they are licensed.
What are SEBI’s Guidelines About Stockbrokers?
To control fraudulent activities in the Indian share market, the SEBI has developed some guidelines. And every broker or brokerage firm requires you to meet these guidelines. These guidelines work as the restrictions for the brokers who aim to cheat traders.
Entrance Fee
SEBI demands the huge upfront fee that a broker or brokerage firm needs to pay to the SEBI initially. This guideline helps SEBI to keep the unwanted broker away from the stock market. With this, there are significantly less number of brokers or firms that meet this requirement by which the market stays clean.
Share or Provides Essential Statements
The broker is also required to show the trading activities performed by them. When the investor or trader asks for documents, the broker is obligated to show those records. This provision is also designed to save traders from fraud. However, still, there is an uncertain possibility of bankruptcy.
Need Permission of Investors or Trader
In this guideline, the broker needs permission to trade in shares from the Demat account holder. The broker needs to type the T PIN to verify the transaction, which generally sends to the Demat a/c holder number. Thus, it also adds a security layer to protect innocent investors who can get cheated by the broker.
What Happens If My Stock Broker Goes Out of Business
SEBI, NSE, and BSE keep a close eye on such activities and check whether all the guidelines are implemented. However, if the brokerage firm goes bankrupt or goes bust, the trader does not need to worry too much. They also need to think about the account. If you have a Demat account and there is some balance to buy the shares or other securities. In that case, if the firm goes bankrupt, it can cause you to lose the amount existing in your Demat account. But generally, the long-term investors have zero Demat account balance as they utilize all their money in the long term and short term investment. But if you have some balance in the account, you need to protect that using special protection possibilities.
You need not worry about the shares you are holding; your shares stay with you, not with the broker. Brokers are just responsible for acting on behalf of you, and shares or other securities stay yours, not the broker. Thus, in these cases, you do not need to worry about the shares as it is your method of segregation of assets.
When is The Broker Called a Defaulter?
The broker may be called the defaulter if they go against any guidelines of SEBI or stock exchange.
A broker can be a defaulter if they have performed the trading transaction without the consent of the trader. Or not transfer the fund of the shares or stocks to the investor or trader. Or they performed any act to make some personal profit without the consent of the trader.
All these reasons can cause the need for investigation, and if one of these acts is found, the brokerage firm can be stated as the defaulter.
How Do You Deal If Your Broker Goes Bust?
There are mainly two actions you can take as an investor or trader if your broker goes bust.
Regarding Your Demat or Trading Account
The SEBI has already created the Investor Protection Fund (IPF) to deal with such scenarios. To claim damage or loss, you can notify the SEBI as soon as possible, just after the bankruptcy of the broker.
If you claim damage, then you can get up to Rs15,00,000 from the Investor Protection Fund.
If you claim this damage within the three years of the broker’s bankruptcy, then the claim amount will be decided by IPF.
If you claim the damage after the three years of the bankruptcy of the broker, then you will not get compensated.
Regarding The Shares of The Trader or Investor
In this case, the shares can stay anywhere with the depository, i.e., CDSL and NSDL. And wherever the trader thinks fit, they can transfer the shares to another brokerage firm based on their suggestions.
Conclusion
Brokers and brokerage firms are essential parts of the share market. Hence SEBI has given some essential guidelines to save its investors and traders. If such a situation occurs, it allows the trader to claim their loss of up to Rs15,00,000. However, to prevent such problems in the future, you should check the famous and reputable brokers to trade with. So, I hope you have a clear idea of what you can do if your broker goes bust.