After the recent Finvasia 13th april Technical glitch/ghost trades fiasco which caused lots of panic to traders, there are few questions that came to my mind. Although Finvasia didn’t handle the downtime properly, they were kind enough to refund the losses incurred due to the technical glitches
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?
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?
Your valued comments highly appreciated to the trading community.
@VenuMadhav had written this post when the new pledge-repledge system started.
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:
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.
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.
Is it possible with mutual funds as well? as selling mutual funds credit to bank account rather to broker? Any loop hole here that any broker can misuse?
what about traders with unpledged pure cash margin that we upload into trading acc, are they safe or does brokers have power to use that margin for their use during bankruptcy?
That means in the event of bankruptcy, forget about the liquid cash margin even pledged scrips are not safe
Considering only 10% of traders make money in the market, tax slabs, revised STTs, brokerage, brokers’ technical glitches/downtime & then this kind of insecured pledged shares, theres too high risk to even think of becoming full time trades in the first place
We never know which broker might go bankrupt in the event of one black swan day.
Not possible with mutual funds anymore since now the proceeds go directly to the customer’s bank. While it is suitable for the customer, the broker takes a lot more risk when what is pledged are mutual funds since if accounts go in debit, pledged MF can’t be squared off to cover it. The best broker can do is to keep the MF blocked and hope the customer makes good on the debit.
The money belongs to the customer, so if a broker goes bankrupt, the money still belongs to the customer. Bankruptcy proceedings can’t access customer funds. But that said, a broker who wants to commit fraud could use customer funds for whatever purpose. Since the Karvy episode 4 years back, SEBI has made many regulatory changes which makes it really really hard to do it today. The new talk on upstreaming funds to CC every evening can further strengthen the regulation.
As mentioned above, bankruptcy proceedings will not bring liability to customer funds and securities. The issue is if any broker willingly wants to commit fraud. This risk exists with every financial services business where you keep your funds & securities—banks, Brokers, AMCs, etc.
Good question.
Before anyone answers this though,
here’s the obligatory note that this is purely a hypothetical discussion
to identify risks and ways one can safegard oneself against such risks.
Noone wants to commit any fraud here.
How is a pledge invoked if the loan is not repaid?
The pledgee may instruct the DP to invoke the pledge by submitting Invocation Request Form’
(IRF). On execution of this instruction, the securities are moved from Pledgor’s account to the
pledgee’s account. Invocation does not require any confirmation from the pledgor.
Pledgor is informed of the movement of securities by his DP.
CDSL mentions that they transfer Pledgor’s account to pledgee’s account without confirmation required from pledgor by submitting Invocation Request Form’(IRF). I guess this applies to Mutual funds as well.
I didn’t get the nuances of this process, I hope there are enough checks and balances and time so that Pledgor gets communications of any such activity to sense the misuse if any by broker?
Yes would like to know… @nithin please share the experience with Zerodha when pledged securities are liquidated to debit the client’s shortfall margin.
This is different from pledging to CC for margin to trade F&O. What you see here is pledging to an NBFC/Bank for a loan against security. Two different products.
