What happens to Pledged Shares if Broker Goes Bankrupt?

Question to the Zerodha Team (@nithin , @siva )

A lot of us have pledged shares to Zerodha in order to get the margin required for trading.

And in some cases (including mine), the value of pledged shares can go in several crores.

So, let’s say a Black Swan Event hits the market and Zerodha is not able to manage the risk and had to declare bankruptcy. (very, very unlikely but hey, that’s why they are called Black Swans, right ?:slight_smile: )

In such cases, what will happen to the pledged shares?

  • Are they still going to be in my Demat account?

  • Or do I need to go through NSE/SEBI to recover those shares?

  • Or is there is any catch in getting those shares back?

It would be great if you can shed some light on this.

ps: I have full faith in Zerodha’s ability to handle any adverse market events; I am just being prudent, that’s all :slight_smile:

Cheers!
Neha

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Hi Neha,

Back then, when someone pledge securities, it was moved to Broker’s pool account. With the revised SEBI circular dated Feb 25, 2020, the securities remain in the client demat, but a pledge is marked in favour of the broker (Trading Member ™) who in turn pledges to the Clearing Member (CM) and in turn with Clearing Corporation(CC). For this pledge to be marked, the customer will need to authenticate the transaction using an OTP. The details regarding the changes in Pledging and MTF are explained in this post.

You can check the below mentioned posts for further clarity.

How safe is it to trade with Zerodha.

How safe is our idle money with Zerodha

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Thanks, Abhishek!

I am clear about the process of pledging but I still have doubts about the removal of the pledge.

As you mentioned, there is a series of pledges that happen when the client authorizes it (broker → CM → CC).

My question is that if Zerodha goes out of business tomorrow, how will the pledge be removed?

Will they be automatically removed or is there a process that needs to be followed for that?

Thanks!

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If Zerodha goes out of business, CC shall release the re-pledged securities of that defaulting broker. NCL (NSE Clearing Limited) will be able to unpledge the securities.

There is a Standard Operating Procedure in the cases of Trading Member / Clearing Member leading to default. Clearing Corporation will follow the standard operating procedure and instructions given by SEBI. The circular is attached below for your reference.

https://www.sebi.gov.in/legal/circulars/jul-2020/standard-operating-procedure-in-the-cases-of-trading-member-clearing-member-leading-to-default_46987.html

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Thanks a lot for the clarification!

Always a pleasure to interact with you guys. :slight_smile:

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Can you explain in layman terms, what is written for procedure of unpledge securities in tm client margin account to our demat.?
How much time it take? And is it all our pledge securities are safe?

1 Like

Can you explain in layman terms, what is written for procedure of unpledge securities in tm client margin account to our demat.?
How much time it take? And is it all our pledge securities are safe?