Your Stock Broker is Bankrupt. Now What? Here’s What to Do Next 

“Your stockbroker has declared bankruptcy.”

“Your stock broker has been barred from the exchange.”

These pieces of news can be frightening for clients that broker. It’s a scenario that no investor wants to find themselves in, but it can happen. When your stock broker declares bankruptcy, it can be a frightening situation that leaves you unsure of what to do next. However, there are steps you can take to protect your money and confidently manage the process. I will guide you through the step-by-step process to follow when your stock broker goes bankrupt or it has been declared as a defaulter by the exchange, so you can protect your stocks and money in your trading account.

Introduction

A stockbroker is a financial professional who acts as an intermediary between investors and the stock market. They provide a platform for investors to buy and sell securities such as stocks, bonds, and mutual funds. Such platforms include Kite by Zerodha, groww, Upstox Pro, Fyers One, trade tiger, etc. These platforms provide various tools which help investors and traders make informed investment decisions. 

If you want to buy or sell shares, you must first deposit funds in your trading account which is maintained by the broker. 

Every year some stock market brokers go out of business. This could be due to bankruptcy, or due to failure to of compliance with rules and regulations set by SEBI. 

If the broker is small then the news of its going out of business is not widely covered by the media however in the case of big brokers such as Karvy it makes the news headlines because a lot of large investors and traders have accounts with them. 

The reasons for expulsion / defaulting by the exchange could be as below:

1. Shortfall of client funds and securities
2. Misuse of client funds
3. Non-resolution of investor complaints
4. Non-settlement of client accounts
5. Falsification of information and misrepresentation of data submitted to the Exchange 

In fact, NSE regularly updates the details of the defaulter and expelled members. You can access this data from the link below:

LIST OF DEFAULTER / EXPELLED MEMBERS

Let’s say any broker goes bankrupt then the primary concern for an Individual Investor and Trader will be:

1. What will happen with the Holdings/Investment Shares?
2. What will happen with the Money/Capital in the Broker’s Trading Account?

Now understand both cases one by one.

What Happens to Your Investments if Your Broker Goes Bankrupt?

1. What will happen with the Holdings/Investment Shares?

In India, there are two depositories that hold the shares in demat form- CDSL and NSDL. Here both CDSL and NSDL are backed by the government and are completely safe. Whenever you buy shares from the trading platform, these shares are sent to the depository of which the stock broker is a member. So in short your shares are safe with the depository. 

Since the securities are stored safely at the depository, you will be able to move your holdings to a different stockbroker of your choice if your current broker defaults.

If you sell shares (which you have in your demat account), they will be transferred to the buying party and debited from your account. Earlier brokers used to invariably ask for POA (power of Attorney) from the client as part of KYC while filling the demat account opening form so they were free to buy and sell the shares in clients’ demat accounts without the permission of the client. This allowed the misuse of clients’ funds. So in 2020, SEBI came up with an order which stated:

• No stockbroker or depository participant shall deny services to the client if the client refuses to execute a PoA in their favour.
• PoA is optional and should not be insisted upon by the stock broker/stock broker depository participant for the opening of the client account.

If you have not given POA to your broker then you will get an OTP before selling your shares. Without this authorisation, the broker will not be able to sell the shares held in your demat account. 

2. What will happen with the Money/Capital in the Broker’s Trading Account?

The good news is that SEBI created a fund maned ‘Investors protection fund’ in 2007. The amounts disgorged and credited to the Fund, along with the interest accrued, are utilized only for restitution to eligible and identifiable investors who have suffered losses resulting from securities law violations.

But the bad news is that there is a limit to the amount to which the amount can be reimbursed. In the case of NSE, the maximum value of such a claim is 25 lakh. The amount is 15 lakh in the case of BSE, any amount lost above this can not be recovered. This process of complaint redressal and dispute resolution takes a lot of time. 

What Should You Do if Your Broker Goes Bankrupt?

If your broker goes bankrupt you should immediately make a claim in the exchange for a settlement of funds. The time limit for making the such claim is three years. You can refer to this circular from SEBI which provides a description of the eligibility criteria for filing such claims. 

For information on how to file a claim for compensation, please see these NSE and BSE pages. Regarding claims resulting from expulsion/declaration of default of members, NSE sets a maximum limit of 25 lakhs per investor per defaulter/expelled member. In contrast, BSE offers protection up to Rs. 15 lakhs.

How to file a claim in case of broker default

Claims have to be raised with the exchange where trading was done. You can go to these links to file the claim on NSE or BSE. 

Investors can lodge their complaints in the format prescribed by the Exchange along with the supporting documents through the following means:

Online process for NSE

For registering their complaints in electronic mode through the NSE website go to the NSE Website: www.nseindia.com 

1.  Access the Menu as follows:
2.  Home > Invest > Making a Complaint > File a complaint online 
3.  Fill in the relevant details 
4.  Attach the documents as asked in the complaint form and submit. 
5.  While submitting, ensure that a valid email id and mobile number are entered. This is required for NSE to get in touch with you. 
6.  On successful registration, you will receive an email on your registered email ID with the details of your user id and password. 
7.  Preserve this E-mail. It is needed for filing new complaints, tracking complaint status and updating responses to queries raised and uploading documents 

Offline process for NSE

For registering their complaints in physical mode through the NSE website go to the NSE Website: www.nseindia.com  

1. Access the Menu as follows:-  
2. Home > Invest > Making a Complaint > Download complaint form  
3. Download the relevant form  
4. Fill in the relevant details asked  
5. Attach photocopies of the documents as asked in the complaint form.  
6. Submit it to the nearest Regional office in your zone.  
7. While submitting, ensure that a valid email id and mobile number are entered. This is required for NSE to get in touch with you. 

The mandatory documents required to be submitted with the claim form are:

• PAN card 
• KYC details 
• Ledger account statement for the previous financial year and current financial year 
• Margin ledger account statement (wherever applicable) 
• Demat account transaction statements for the previous financial year and current financial year 
• Bank account statement evidencing payment made to/from the trading member for the previous financial year and current financial year 
• Cancelled cheque – to be provided for the bank account mentioned in point number 4 of the claim form 

• Details/communication from/by other stock exchanges approving/rejecting claims, if any 
• Any other documents, the investor may choose to provide 

For a detailed description, you can also go through this user manual for making a complaint on NSE.

How to minimise risk from Broker Bankruptcy

To protect yourself from the risk of broker bankruptcy you can take the following measures:

1. Choose a reputable broker: Selecting a trustworthy broker is the first step in reducing the danger of broker bankruptcy. Look for brokers who have a solid reputation and are registered with the Securities and Exchange Board of India (SEBI). Before creating an account, look into any disciplinary measures or complaints made against the broker.
2. Diversify investments: To reduce the danger of losing all investments in the event that one broker defaults, it is crucial to diversify investments across several brokers. To lessen the danger of a single point of failure, spread assets among various asset classes and brokers.
3. Withdrawal of funds: Since the maximum recoverable amount is 25 lakhs, you should withdraw any unused funds above the recoverable limit to your bank account. 
4. Monitoring brokers regularly: Investors should monitor their brokers’ reports regularly and keep track of their working style and response to the queries sought by the exchange. If there are any unusual or unexpected changes, it’s important to investigate and take corrective action if necessary.

Conclusion

The selection of a reputed and reliable broker is an absolutely important decision that befits making investments. From time to time SEBI has come up with various rules and regulations to protect the shares and money of people making investments in the stock market. It is vital to know that when your stock broker goes bankrupt or is barred by the exchange from carrying out its business, your shares are completely safe as they are lying with the government depositories CDSL or NSDL but there is a limit on the recoverable amount which has been lying in your trading account. 

There are ways by which you can minimise the impact of broker bankruptcy on your trading account capital. To file a claim for a refund of the capital with the exchange, detailed guides of the same are available on NSE and BSE websites. 

FAQs