Broker Defaults Rise to 28 with NSE Expelling 5 More Brokers Since April 2021
Moneylife Digital Team 16 July 2021
Fresh broker defaults continue and the industry is now seeing a record 28 defaults or expulsions since November 2019, just a little before the pandemic. In our article in December 2020, we reported that this was the highest number of broker defaults in the past 20 years. Until then, there were 18 broker defaults on the National Stock Exchange (NSE). If the brokers have a membership of the Bombay Stock Exchange (BSE), they are suspended by that Exchange too. In March 2021, when more broker defaults were reported, we pointed to regulatory lapses by the Exchange and called for action by the finance ministry (Read: 20 Broker Defaults: It’s Time the Finance Minister Demanded These Specific Actions).
Ten more brokers have defaulted and/ or been expelled by the NSE between December 2020 and July 2021. Of these, five have been expelled by the BSE too. Most defaults have inflicted crippling losses on investors, although the settlement guarantee ensures that there is no impact on the market itself. In many cases, brokers used investors’ shares to obtain leverage and take speculative positions on the derivatives market leading to losses. 
Sometimes, they passed back a small interest for the pledged shares but, in many cases, investors were unaware of their shares being pledged.
For instance, in 2019 Karvy Stock Broking was banned by the Securities and Exchange Board of India (SEBI) for defaulting clients for around Rs2,000 crore making it one of the biggest such cases in India.
List of defaulting brokers on NSE
Among the recent expulsions are Sumpoorna Portfolio Ltd, Action Financial Services Ltd, Reflection Investments, Bezel Stock Brokers Pvt Ltd, Conard Securities Pvt Ltd, Arcadia Share & Stock Brokers Pvt Ltd, Star Share & Stock Brokers Pvt Ltd, Destiny Securities Ltd, and Stampede Capital Ltd
This list does not include the two firms, which abruptly closed their capital market business of their own accord (voluntarily). One is IndiaNivesh, whose voluntary closure has led to litigation between HDFC Bank and Edelweiss Custodial Services and exposed the shady practice of 'funded fixed deposits' being accepted by the clearing corporation as collateral. In this case, the dispute is over a Rs100 crore funded FD, which HDFC Bank refused to honour.  The other was Action Financial, which initially claimed to have done a voluntary closure but was later expelled by the exchange since it had failed to refund investors money. (Read: IndiaNivesh, Edelweiss & HDFC Bank: The Curious Case of Rs100 Crore Fixed Deposit Receipts)
In October 2020, market regulator - SEBI announced that NSE increase its investor protection fund (IPF) to Rs1,500 crore. However, even this increased corpus might not be enough to fully reimburse all clients as the default by brokers in the derivative segment is higher. Exchanges too have an obligatory cap on how much money each investor can claim.  SEBI had also directed exchanges to conduct an annual review to ascertain the adequacy of the IPF; disclose IPF corpus on a monthly basis and implement a standard operating procedure for processing investor claims. (Read: SEBI Asks NSE To Increase its IPF Corpus to Rs1,500 Crore from Rs594 Crore at Present)
More importantly, clients can go to exchanges with their claim only after a broker is declared a defaulter. Often, the delay in declaring brokers as defaulters leaves client claims in limbo and the investor clients end up waiting for a long time to get their funds back. 
In many cases, the claims are rejected citing some little-known rules and procedures. Hapless clients then approach the High Court but even there it is a long-drawn legal battle.
While earlier broker defaults were often due to the broker’s failure to honour settlement obligations with clearing corporations, broker defaults in recent years come by when they are unable to repay client assets—shares or money—as and when required.
Broker default in refunding client assets is primarily due to diversion of client funds or securities towards businesses other than those of securities – most of the time real estate or financing for speculative trades. 
Last month, SEBI issued a framework to minimise the risk of misuse of investor funds by stock brokers. The new measures are part of the market regulator’s effort to prevent misappropriation and misuse of client funds by brokers and also to protect the clients in the event of a default by the brokers. (Read: SEBI Develops System to Detect Misuse of Client Securities by Brokers)
This follows several instances of brokers misusing clients’ securities for trades that were not authorised by them and submitting false information to stock exchanges. 
Unfortunately, nothing seems to stem the spate of broker defaults and voluntary closures of business by brokerage firms—especially among commodity brokers. 
This list has not looked at the commodity markets, which are now allowed to trade in equities and are also under SEBI regulation and supervision. 
3 years ago
the investors should insist on obtaining copies of Inspection report of inspection and compliance department of both exchanges of all the
suspended brokers for all past three years . this will enable them to see the quality of work of inspection dept.
3 years ago
In cases where there is clear cut case of misuse of funds and securities it is duty of stock exchange inspection and compliance department to detect such cases. Onus totally lie on the exchanges to compensate the investors without any limit.Misappropriation or missuse by broker is clearly the case of negligence of duties by inspection and compliance department of exchanges.before NSE IPO the Sebi should separate inspection and compliance department from the exchanges and appoint a new compliance and inspection agency to work under SEBI independent of both the exchanges. misuse should have been detected by the inspection and compliance department.The head of this department's of both exchanges and also the exchange top management need to answer to the poor investor who had lost hard earned money .further all penalties collected by the exchanges like margin shortage etc should go to the investor protection fund . I hope this is being done and not taken as profit by the exchanges SEBI needs to be very tough on this and act fast. One piece of advice to all investors always work with the reputed broker don't go to any small broker for any of your friends who has taken agency of such broker be very careful and alert.
3 years ago
The best way to "regulate" is to hire staff. Period.

Stupid, arbitrary, and stricter rules make absolutely no sense whatsoever, especially when risk is the most misunderstood 4-letter word that "screws" even the well-protected. Even well-intentioned brokers run into problems, mostly because of rules, more rules, and even more nonsensical compliance stuff. Yet, compliance is what keeps them out of trouble in the first place. A dichotomy of sorts. And well intentioned regulators make things worse when they fiddle with the rules with regard to risks without understanding of how businesses work.

Brokers need to hire compliance managers to sort out their mess (yeah, running a business is expensive, especially with *sic* stupid rules, so much for "ease of business") , investors need to hire advisors to prevent them from doing stupid stuff (like keeping money with sketchy brokers, and not knowing their rights), and regulators need to hire staff for their supervisory and handholding division (even brokers need handholding!!). I'm baffled why regulators cannot beef up their supervisory divisions. They have all the money in the world (thanks to IEPF and all sorts of nonsense they earn through penalties).

Oh well, at least "free markets" doing its thing and weeding off the hacks. So good riddance? I don't know. I guess some consumers bearing the brunt of this nonsense for no fault of theirs, which seems tad unfair. And the big brokers will win. Life can be hard, unfair, and twisted. Time to read Shakespeare.
3 years ago
So as an investor , what are the list of do and don't. What are my risk with every do? What are my legal options when things go south. Class Action suits? Precedents? Legal fees I believe are in the range of 10% or minimum 200,000.
3 years ago
We are a group of 25+ Investors fighting against similar Fraud done by a broker Dealmoney. Please write on this too
3 years ago
Despite of having such tighter controls of SEBI, yet so many brokers have failed!

If SEBI makes it compulsory to route clearing and settlement function thorough professional custodians ( like in PMS, Institution trades ), such failures can indeed be protected in future!

Let’s improve the age old practice and give shape to more credible alternative by allowing brokers only for bringing business to markets. Let risk in managing custody and clearing of trades be managed by well capitalised and well compliant bank custodians.
3 years ago
Free Helpline
Legal Credit