Correction. For physical delivery settlement, now that settlement of F&O and stocks are merged into one, we don’t need to use the pledge route to debit securities. Stocks go directly from demat to CC if there is a give physical delivery position after expiry.
Also when customers give us securities as collateral and say the account goes into debit, we stop allowing customers to take new positions. And since the collateral value is typically always higher than the debit amount (due to haircut), customers on their own sell the stocks or transfer money to make up for the debit. So we hardly ever have to square off collateral forcibly. But that said we haven’t seen a bear market that has lasted for long time since we started the business, maybe we will be forced to do this in the future.
Sir here do you mean that the customer loses his money and will not be protected under the investor protection fund in case the broker willfully does fraud or bankruptcy ? (Even though PoA is not given to the broker by the client).
@stonecold i read it as follows…
- Client holdings not affected as broker does not hold client securities.
- Client funds remain in the name of the client.
Even in the event of the broker declaring bankruptcy,
they cannot be taken away to square-off the broker’s liabilites.
However, all bets are off if a broker commits fraud
i.e. accesses client’s funds or securities without the client’s consent.
(eg. using PoA provided by client.)
Even with heavy regulation and the threat of severe punishment for breaking rules, you still can’t do business with someone you don’t trust.
I am asking in case PoA is not given and if nothing is provided from Investor protection fund then what is the use of having such a fund ?
Yep, you got it right.
Fraud and Bankruptcy are two different things. Not all bankruptcy happens due to fraud, many businesses can go down due to wrong business decisions or just bad luck.
If there is fraud, the Investor protection fund does come into play, but what I was telling is that it can take time. In case of fraud, how does the arbitrator even know what is genuine or not? Including a claim made by a client. The process can take some time.
@nithin so in the worst case if a broker knows they’re going to be in trouble anyway and decide to do fraud before going down, they can square off shares from client demat irrespective of whether it’s pledged or not and transfer the balance out to anywhere they want right?
It’s their system, so they can techically even block client access while doing this, so I’m guessing in such an extreme scenario the client can only monitor the depository notifications and realise fraud is happening/has happened, proceed legally and wait for the investor protection mechanisms to run their course.
From your earlier comment, mutual fund pledging seems more fool proof from a client perspective in such a scenario.
PS. Hope it never happens, but thanks for taking time to clarify things which no one usually talks about until something really bad happens
Also in case of bankruptcy with no wilful fraud, how does a client recover casor transfer out cash/securities etc. What should one expect in such a case in terms of overall process, timelines?
The securities sit in your demat account with NSDL and CDSL. If a broker is going bankrupt or deciding to shut shop, you can move your security to any other demat account of yours.
Your cash anyway today doesn’t comingle with brokers’ funds. You can just request for a fund withdrawal request on whatever day.