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What Happen if Stock Broker Shut Down?

24 Feb 2022 0 COMMENT

Jayesh started investing in the stock market through a stockbroker two years ago. He carefully picked a stockbroker with a good track record based on clients' online testimonials. When Jayesh learned from the news reports that his stockbroker has shut their operations, he got worried about his stock-holdings. Can Jayesh recover money paid to the broker? What happens to the shares he has invested in this case?

Before we understand this dilemma of Jayesh, let's know some basics of stockbroking and stockbroker.

Who is a Stockbroker?

A stock market broker, also called a stockbroker, is a capital market intermediary who facilitates the purchase and sale of securities on behalf of financial institutions, investor clients, and businesses that wish to invest or trade in the stock market. Both institutional and retail customers use stockbroker services to complete transactions in the market. These stockbrokers are regulated by the stock exchanges and the capital market regulator Securities and Exchange Board of India (SEBI). A stockbroker's primary responsibility is to execute buy and sell orders for their investor clients. In addition to this, many investors rely on stockbrokers' knowledge and expertise about market dynamics. A stockbroker can work both independently or as part of a brokerage firm and provide the following additional services -

  • Serve as a record keeper of transactions, keeping track of all trades, statements, and so on.
  • Stockbrokers manage your investment portfolios and provide regular updates on the portfolios.
  • Many stockbrokers communicate new investment opportunities in the stock market to you.
  • Some stockbrokers also assist you in making changes to your investment strategies based on market conditions.

The stockbrokers are strictly monitored and regulated by stock exchanges and SEBI to safeguard investors' interests. Still, there may be cases where either a stockbroker shuts down operations or is declared a defaulter.

Additional Read: 5 Smart Tips for Beginners in the Stock Market

In What Conditions can a Stockbroker Shut Down?

A stockbroker can shut down its services in two cases; either they can wind up their operations voluntarily, or the shutdown can result from default or due to penal action taken by SEBI. In addition, when brokers violate SEBI or the corresponding stock exchange's rules or regulations, they may be declared as defaulters.

A broker may have violated one or more of the following to be declared a defaulter:

  • Transactions were made without the permission or authority of the traders/investors.
  • The funds related to the sale of stocks have not been transferred to the traders/investors account.
  • Used trader/investors' accounts to engage in trading to make personal profits for a stockbroker.

But if a stockbroker shuts down, what happens to my shares?

Position of Shares and Trading Account:

If your stockbroker shuts their office for some reason, nothing will happen to your stocks or shares. The problem would be with your trading account. Your stocks and shares are held in your Demat account, which is maintained by the depositories. If your broker has closed, you can take the following steps to protect yourself from loss:

  • For Trading account:

The Exchange has established an Investor Protection Fund (IPF) to protect traders and investors from such situations. You can file a request for a claim from IPF. You can get up to Rs 25 lakhs in compensation if you apply within the limitation period. If you file the claim within three years of filing for bankruptcy by the stockbroker, you may get a refund from the IPF.

  • For your shares:

The National Securities Depository Ltd. (NSDL) or the Central Securities Depository Ltd. (CDSL) hold your shares. The stockbroker merely manages and facilitates trades in these stocks on your behalf. So, in case a brokerage firm closes, there shall be no impact on the stocks held by you. You can open a trading account with some other stockbroker of your choice.

But what if I gave power of attorney to my stockbroker? Generally, a stockbroker has no ownership over the stocks you hold in your Demat account. Before the broker can use your stocks for trading, your approval is needed. Stockbrokers may request power of attorney from you for conducting quick trades. You should be extra vigilant if you have given a power of attorney to your stockbroker. If you come across any unusual activity in your trading or demat accounts, you should raise a red flag. You should not ignore SMSs and emails received from the broker, depository and stock exchanges. In addition, you should frequently check your trading transaction statement. This will allow you to file complaints to stock exchange or to SEBI. Despite this, if your stockbroker violates the norms, you can write to SEBI on its online complaint redressal platform (SCORES).

Also Know: How to Value a Stock before Buying?

Conclusion

Although the stockbrokers and the trading accounts make trading easy for you as an investor, they should not be left unattended. Check your trading records regularly and keep an eye on the brokers' performance and adverse news pertaining to your broker. If you believe your brokerage firm is defrauding you as an investor or trader, do not panic. Remember, you should not hesitate to file a complaint with SEBI or the corresponding stock exchange.

Disclaimer:

ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.