Active Stocks
Tue Mar 19 2024 10:11:06
  1. Tata Consultancy Services share price
  2. 4,030.00 -2.77%
  1. Tata Steel share price
  2. 149.65 0.03%
  1. NTPC share price
  2. 313.05 -1.29%
  1. HDFC Bank share price
  2. 1,442.05 -0.29%
  1. Tata Motors share price
  2. 964.60 -0.78%
Business News/ Markets / Stock Markets/  Of stock markets, brokerages and the trade in trust
BackBack

Of stock markets, brokerages and the trade in trust

The market regulator is considering the possibility of barring brokers from settling and clearing trades
  • Money that sits in a brokerage account does not have a formal guarantee
  • The regulator directed Karvy to refrain from taking on new clients.Premium
    The regulator directed Karvy to refrain from taking on new clients.

    India’s financial sector seems to be hurtling from crisis to crisis. The latest one involves Karvy Stock Broking, which allegedly diverted clients’ money. This could snowball into a bigger crisis as several banks and NBFCs have exposure to Karvy. Mint takes a look.

    What happened with Karvy Stock Broking?

    On 22 November, the Securities and Exchange Board of India (Sebi) passed an interim order against Karvy based on an NSE report that found the firm had transferred client securities to itself, besides pledging them to borrow money. The report found that Karvy had transferred 1,096 crore to a group company, Karvy Realty. The regulator directed Karvy to refrain from taking on new clients. It also asked the depositories (NSDL and CDSL) to not honour instructions from Karvy Stock Broking acting on the basis of power of attorney given by its clients in order to prevent further misuse of clients’ securities.

    Graphic by Sarvesh Kumar Sharma/Mint
    View Full Image
    Graphic by Sarvesh Kumar Sharma/Mint


    So how safe is a brokerage account?

    Money that sits in a brokerage account does not have a formal guarantee. An investor can, however, recover the money from the broker by filing a complaint with the stock exchange. If the broker is declared a defaulter, the investor can file claims with the Investor Protection Fund of the exchange. In India, shares purchased through a broker are held in the name of the investor in a dematerialized (demat) account, which is meant to hold securities. Stock brokers, however, routinely take power of attorney for such demat accounts to execute trades. This power can sometimes be misused.

    What action is Sebi taking to fix the problem?

    The market regulator is considering the possibility of barring brokers from settling and clearing trades. Custody of client collateral, settlement, and clearing of trades may be managed by well-capitalized bank custodians. Transfers of client shares to a pool account or broker proprietary account may also be restricted.

    What action can an investor take?

    Investors can file complaints with the broker. If not satisfied, they can approach the investor services cell of the exchange in question. For instance, an online complaint can be filed with NSE. The exchange will try to recover the money from the broker and repay the investor. However, if the exchange declares the broker as a defaulter, it will invite claims from the public against its Investor Protection Fund. Investors can also file complaints directly with Sebi online on its SCORES platform.

    What are the criteria for choosing a broker?

    Brokers can be full service or discount. Full service brokers offer research and recommendations but tend to charge more. Discount brokers offer only execution but charge much less. Investors should also look at the broker’s parentage. Brokers owned by banks let you to keep funds in your own bank account rather than in a brokerage account. This lets investors earn interest even as they have control over the money. If the discount broker has a strong financial background, default may be less of a worry.

    Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

    ABOUT THE AUTHOR
    Neil Borate
    Neil heads the personal finance team at Mint. A former colleague called them 'money nerds' and that's what they are. They cover topics like mutual funds, taxation and retirement, all to improve your chances of building wealth. Neil graduated with a degree in law and economics. He passed the CFA Level I exam and began his writing career at Value Research, a mutual fund research firm in 2016. He joined the personal finance team Mint in 2019. Everyday, the Mint Money Team tackles personal finance questions such as where to invest and where to borrow, through articles, charts and reader queries. They also have a daily podcast - 'Why Not Mint Money' and an annual ranking of mutual funds - the Mint 20.
    Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
    More Less
    Published: 26 Nov 2019, 12:03 AM IST
    Next Story footLogo
    Recommended For You
    GENIE RECOMMENDS

    Get the best recommendations on Stocks, Mutual Funds and more based on your Risk profile!

    Let’s get started
    Switch to the Mint app for fast and personalized news - Get App

    Chat with MintGenie