Thousands of retail investors remained high and dry, with over two dozen stock companies being told to close stores after being categorized as defaulters due to misuse of client funds and securities. Retail investors will have to wage a legal battle to get their money back, and that can take time.
Despite the fact that the market regulator SEBI has recently taken several actions, such as changing the rules related to power of attorney (PoA), margin collection, pledging and re-pledging of client securities and fencing of client funds, brokers continue with tasks.
The latest defaulter
Stampede Capital from Telangana was the last to be expelled. NSE approved Stempede’s algae trading platform in July 2014, but six years later, it issued a notice to the broker about the disclosure due to 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 customer dissatisfaction or misuse of securities. Many have been declared defaulters, but several are still under scanner or on the list of potential defaulters, sources said.
Karvy was the biggest broker supplying retail customers and whom NSE declared defaulters last year. It took almost a year for the exchange to declare Karvy defaulter after it came to light in 2019 that it had misused clients ’securities worth nearly 2,000 kroner using a proxy obtained.
According to regulatory experts, there is great concern that claims against non-eligible brokers could significantly exceed the investor protection fund maintained by NSE and BSE. In November last year, SEBI ordered the stock exchanges to increase their IPF to 1,500 ₹ crore. Even this improved corpus may not be enough to fully recoup the costs of all clients, because the default brokers in the derived segment are higher, experts say. Also, exchanges have imposed a limit on what any investor can demand. Clients can go on exchanges with their claim only after the broker has been declared defaulter.
Delays in declaring brokers defaulters leave clients’ claims uncertain. SEBI or the stock exchanges have so far not provided precise data on the task or the number of affected clients.
The operation needs to be studied
“The modus osperandi brokers on how to smear insanity and run away with client money should be studied. SEBI did some work and set new rules. Still, a 100 percent return on a client’s money should be paramount, and brokers, and even those who review them, should abide by the rules. The regulator needs to do more, ”said Shriram Subramanian, an expert on corporate governance and investor issues.
“SEBI has taken some corrective steps, but time will tell its effectiveness,” said JN Gupta, a former SEBI official and investor rights advisor.
SEBI is blamed for the slow process of investigating the diversion of funds by brokers and holding stock exchanges responsible for regulatory failures and timely settlement of claims. Separation of funds at the level of exchange (clearing and settlement) is assumed. Lawyers suggest that clients form a group and redirect the Securities and Appeal Tribunal to stock exchanges that need to declare brokers defaulters for an unusually long time.