What happens to Pooled shares if broker goes bust

I have few questions regarding safety of our capital - stocks+cash with broker in case broker goes bankrupt. I read the previous posting on this but have few unanswered questions:

  1. It is said that stocks are safe since they are in CDSL/NSDL and we can easily transfer to other Demat account. However what if they exist in Pool account and the broker has pledged them. Are the stocks safe then or would only know after all brokers assets are liquidated and liabilities are cleared?

  2. Cash lying with broker. Is this safe or would also be used up to pay shortfall in assets to clear broker liabilities? If assets are short of liabilities, can brokers personal assets be attached?

  3. I understand IPF compensates each trader to extent of Rs.25 lacs. But is this cash+pool shares combined?

  4. What actions should an investor take to get money back in such a scenario?


Awaiting for the reply…

@siva @nithin Sir, Can you please share you views on what would be the consequence in these situations and how can we get our shares back.

The new regulations from SEBI strictly prohibit the broker to pledge client securities to any third party, even if the securities are not fully paid and if broker has kept it in the pool account until the full amount is paid by the client. But yes, if a broker goes bust and if your stocks is in the pool account and/or you have funds lying with the broker, you potentially could have problem recovering it. This is almost exactly like the way it is with the banks where your funds lie. Banks are allowed to leverage on your funds, whereas a broker isn’t. In that way, there isn’t too much of a risk. Usually if brokers go bust, it is most likely a scam run by the broker. And brokers who scam, you as a client get to know well in advance by their practices - not giving payout in time, unauthorized trades, securities moved without authorization, wrong billing, etc. It is best to move out of such brokerage firms.

IPF covers 25lks in all per client. In such a case a complaint needs to be raised with the exchanges.


Thank you Nithin, below is an excerpt from order passed by SEBI against BMA WEALTH CREATORS:

On analysis of financial details including client trail, enhanced supervision submission, Exchange files and Clearing Members Submissions made by broker and clearing members for date August 30, 2019, NSE observed that the total amount payable to the clients were amounting to Rs.56.83 crores. Total funds for the corresponding dates with bank/ clearing member/ Clearing Corporation were amounting to Rs.52.39 crores, thereby indicating shortfall of funds to the extent of Rs.4.72 crores.

Further, upon inquiry by NSE regarding the shortfall of security amount, on September 24, 2019, BMA has provided an undertaking to NSE, where they have affirmed that all securities of the clients are lying with them without any shortages. However, on the basis of verification of the holding statement(s) of the depositories there is a shortfall observed by NSE, in the value of securities, to the tune of Rs.93.31 crores.

In this case would the shortfall be made up by utilizing secutiry deposit furnished by broker to NSE, tanglible assets of the company and if not sufficient then only would IPF be used, yes? Networth of BMA stood at Rs.12 cr as on 31.3.2019.

Yes, you are right.

Btw, I have heard that the promoters are absconding (not 100% sure) from market participants. If it is true, I doubt if their networth will be much as of now.

Promoters I dont think are absconding as they are emailing, communicating with all clients. Also back office is helping with all requisite data.

@nithin @siva

Nithin & Siva.

Is the Client Collateral Account immune from broker misappropriation?

Clients pledge securities and using the margin trade on derivatives, if the broker goes bust, the securities lying in the client collateral will it be used to fund the broker liability?

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I am not getting why exchange allows to settle brokers liability with the funds of client lying in his trading account in the first case. What if brokers liability isn’t discharge even after utilising his clients money . In that case I don’t know who would be responsible for shortfall wheather clearing member , exchange or any other insurer. So why not accounting clients money as a brokers outside liability which he is required to settle instead of using that amount to settle other liability.

Client collateral given for derivatives is kept with NSCCL (clearing corp). So, not as risky as in brokers pool account.

You know what happened to PMC bank right? People who had money in their savings account is at risk because of the HDIL default. Broking, Banking, etc work the same way.

Yes, if even after utilizing client’s money there is a shortfall, it is on the clearing member and then clearing corporation.

How to check if Client collateral given for derivatives is kept with NSCCL (clearing corp).

hmm… a client can’t really see it.

I am suprised after so many defaults -Kassa finvest, Unicon securities etc etc following the same pattern of pledging client shares. Yet SEBI has no way to check if any new broker is not pledging the shares

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So BMA has defaulted and NSE will pay from IPF. Are there no repurcussions for promoters. What is the incentive of not defaulting then? You can see the number of defaults this year and last. Integrity is comprised.