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Is your MONEY & SHARES safe with the Stockbroker?


Are my money and shares safe with a stockbroker?

Can my broker withdraw my money from the trading account whenever he wants?

What if the stockbroker sells all my shares and flees with my money?

Can I do anything about it?

I guess these thoughts must have crossed your mind when you were thinking about making your first investment in the Stock Market. In fact, chances are this could have been that one good reason to steer you away from the market.

Don’t worry, as this article will help you to banish all your doubts and I will try my best to give you a clear picture of every regulation set in place to avoid such mishaps. So don’t bounce out, keep reading till the end. 😜

You will be well aware of some very important facts. If you are frightened of facing something like this, let me remind you this is something that seldom happens or cannot happen at all.

Our country is at an abundance of Stock Market Brokers. With the Capital boom and rapid user accumulation of discount brokers, the Indian market is in for tight competition among the brokers. Attractive offers, rewards, and discounts are some crowd-pullers which sometimes even let you create an account literally at zero cost and trade without giving brokerages for a specific period.

The competition is so strong that even full-service brokers are forced to reduce their brokerages and to come up with better offers to stay on par with their competition.

This is in a way helping to increase the market participation and is the prime reason for the user’s spike in the Indian Stock Market. But on the other hand, an attractive offer can take a toll on the brokerage firm which in a worst-case scenario can lead to its bankruptcy. But fear not, as this is highly speculative and chances are very less as brokers will always find a way to stay above their break-even. Hence, it's highly unlikely but certainly not inevitable as in the case of the 2008 recession where similar things happened in the US Markets.

We will discuss the bankruptcy and busting of stockbrokers in another article, now let us put our focus on the safety of our money and securities with a stockbroker.

To read my previous article about Discount Brokers, click here.

Stockbrokers


Stockbrokers or brokerage firms are market participants that are licensed bodies under SEBI which act on behalf of traders or investors.

The first thing we have to understand is, the stockbrokers are just intermediate bodies that link the investors or traders with the exchange. They make it easy for us to buy and sell our securities.

They don’t have direct access to our money or the shares. So, they can’t withdraw it and vanish into thin air. What they can try is to do is to manipulate their trades and default on reporting to SEBI, which can obviously put them under the Radar of SEBI, followed by a hefty penalty or for the worse, can lead to the brokerage getting banned from trading. This itself is a huge loss for these brokers and no established broker would think about going through all this.

It's all thanks to the stringent regulations set up by SEBI which makes SEBI one of the safest Regulatories out there, even better than the US Regulatory SEC. One of the most famous and recent manipulations executed by retail investors was the infamous GameStop fiasco in the US market, which would have never happened in the Indian markets as we were already having adequate measures and regulations set in place to avoid this specific mishap.

Indian Stock Market brokers are under inspection by SEBI on a regular basis along with the exchanges NSE and BSE which makes it a safe place for the investors and traders. So, a broker doing fraud can never stay out of SEBI’s radar for too long and they ensure that the investors will never be on the suffering side. The level of safety has been taken up a notch after the infamous Karvy Scam which shook the Indian markets.

SEBI’s Regulation


If the Stock Market is a movie, then SEBI is a lead role in that movie. Whenever you talk about the Stock Market the name SEBI pops up. As we talked about movie and lead role, we can compare SEBI as Batman, as Christopher Nolan quoted in his movie The Dark Knight, “A silent guardian, a watchful protector”. 😎

YES… that’s what SEBI does to make the Indian Stock Market as safe as possible. SEBI always comes up with new regulations and rules. Inspects everything that is taking place in the exchange, the brokers, and everything in connection with the market.

SEBI has strict regulations on brokers for smooth and safe operations. Let us check them.

High Entrance Fee

A Few months ago, the CEO of Zerodha, Nitin Kamath was in the news for announcing an annual salary of 100 crores. A funny tweet I read on this was,

“Now I am going to open a brokerage firm to increase the zeroes of my salary”

It's easier said than done because to start a brokerage firm, a huge entrance fee is required to be paid to SEBI. This ensures that only financially stable brokers will come forward and small-timers can be kept at a bay and hence avoiding any possibility for Scams from brokers.

Apart from this, SEBI and the depository will be carrying out multi-level thorough investigations on the firm, its employees, investors, and past associations as well as contracts on future associations.

Now you will be thinking that still there are a lot of brokers out there. Well, a big country with a huge population is never short on growth potential and investors. 😉

TPIN and OTP (eDis)

eDis or Electronic delivery instruction slip is a feature recently introduced by depositories to safeguard the handling of your Demat shares. TPIN stands for Transaction Personal Identification Number, which a demat account holder has to generate from the associated depository and will be directly shared with the user through registered mobile number and email. To sell the shares you are exclusively required to verify yourself with the help of TPIN followed by an OTP.

OTP was introduced by SEBI recently. So, now if you want to sell a share from your demat account you have to enter the TPIN, then an OTP is received on your registered mobile and email. After giving this OTP only the sell order will be placed finally to the exchange.

This is basically granting permission to the Broker to handle your shares for the day as selling a share would involve moving these shares to the broker's account first. This would ensure that the broker will never act autonomously and debit your shares from your Demat.

SEBI currently allows customers to grant a Power of attorney (POA) to the Broker which will allow customers to sell these shares without verification but it is set to be depreciated in the near future.

A broker pulling a wool over your eyes and selling your shares is out of the picture with this exclusive two-factor authentication.

Returning the dormant trading account balance

Let's discuss this topic with a funny experience of mine. One morning a friend of mine messaged me that his money in the trading account is missing. 😰

I asked him to check his ledger report to confirm whether it was an AMC (annual maintenance charge) debit or not. Since the amount was not that small, He raised a ticket to the broker. I advised him to constantly follow up and connect with the support team. They responded that everything's fine and check with the bank but the money was missing.

We decided to check with the bank and if we don’t get it we decided to go to SEBI. After some time, I got a call from him explaining to me that if the trading account is inactive for 3 months, then the broker returns the money in the trading account to their registered bank account. 😑

This is a rule by SEBI which states that all the brokers should credit the available amount in the customer’s trading account if the account was dormant for 3 months. We only knew it when it happened to us and this exposed our lack of knowledge about these basic regulations set in by SEBI. 🤫

The broker usually sends SMS and email when they return the money which he may have missed or not received because of some technical glitch and hence the confusion happened.

Keeping the records

The brokers are obliged to keep records of the trading. A user, whenever they want, can approach the broker and check their trading records. This will allow the user to monitor everything and if a broker fails to provide the records, the user can complain to SEBI which makes things hard for the broker.

Brokers maintain a back-office portal for the user to log in with his credentials and get the reports and trading activity from the day they joined. Like Keystone for Upstox. At the end of each trading day, the portal is updated with the latest trading activity.

Don’t think that who is going to check these. As our money is involved, we must do. If you are a frequent trader, you will do it automatically as you will be interested in knowing the brokerage paid and the exact profit.

Mandatory and regular audits

It is not easy to stay as a stockbroker as the SEBI, the exchange, and the depositories will be really serious with the audits. A broker should be as clean as possible especially with their financials.

The audit books and financials of the stockbrokers are regularly inspected and any discrepancies would call for strict actions from SEBI. Brokers are liable for strict financial disclosures at the discretion of SEBI.

Conclusion


Have you read the blog completely?... 😜

Then you may have understood that it's safe to trust the broker. Because a stockbroker going through all these hectic processes and inspections growing the client list from scratch will be serious about their business. They are well aware of the repercussions of any malpractices and want to stay for a very long term in the market to stay profitable.

It’s their hard work that reflects as customers. That too staying in the loss for the investment phase and growing slow and steady makes them profitable in the long run thus establishing their firm. They will never ever think about their hard work going in vain.

Even though your broker is trusted and reputed it's your duty to keep an eye on the record and transactions as it is your hard-earned money that is involved.

We will discuss “what happens if the brokers go bankrupt or bust” in the next blog.

Stay tuned. 😉

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