Pledge securities but broker default

[nithin]

@Nidal

My general question pertaining to all TM — 1. consider you have X ₹ of securities pledged and you are using the margin to trade in FnO. If tomorrow broker defaults/files for bankruptcy for ‘n’ reasons, do they have the power to liquidate our shares and escape with the money since the securities are pledged?

@VenuMadhav had written this post when the new pledge-repledge system started.

Understanding the new margin pledge system — effective Aug 1, 2020

In the new pledge system, the stocks don’t leave the investor’s demat account, instead a pledge is marked in favor of the broker. The broker is required to open a separate demat account labelled ‘TMCM – Client Securities Margin Pledge Account’ for this purpose (TMCM stands for Trading Member Clearing Member). The broker then re-pledges these securities in favour of the Clearing Corporation and obtains margins.

Some of benefits of the new pledge system are as under:

1. No misuse of securities: Since stocks don’t leave the investor’s account, there’s less chance of misuse of securities. Also, it wouldn’t be possible to pledge one client’s stocks to offer margin to a different client.

This isn’t possible if the securities remain in your demat account. That is, unauthorized movement of your stocks if it is pledged to CC. But a broker can potentially sell the securities marked to pledge and then find a scammy way to withdraw it. As a customer, you have to be aware. The depositories and exchanges send notifications when action is taken in your Demat or Trading account.

@Nidal

I read that nse covers upto 25 lacs of cash balance if brokers defaults. Is there any catch in this? Like only 25% of cover upto 25 lacs, etc ? And what are the timelines to get these coverage refunds from the investor protection funds (IPF)? Is it easy or takes long years to get the refunds?

Check this

https://www.nseindia.com/invest/investor-protection-fund-trust#:~:text=The%20Investor%20Protection%20Fund%20Trust%2C%20based%20on%20the%20recommendations%20of,maximum%20limit%20of%20₹%2025

Refunds can take time, as determining who gets what takes a long time. This is especially when the sanctity of the records maintained by the broker committing the fraud is questionable.