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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