SEBI against the misuse of client’s securities by the Broker

21 Feb 2020

You might have sometime in your trading career used your securities as a collateral by way of pledge. Do you remember that it required transfer of title? You must have transferred your securities on the name of your broker and must have also signed a power of attorney (POA) to allow your broker to handle your securities and assets on your behalf.

Also, you must have heard about the case of Karvy Stock Broking where it was the power of attorney that was misused by the broker. Did you know that your broker might have misused your securities too? Because once the securities move out from your DEMAT, it is just not possible for you to track what happens to them.

The Origin of the Problem Regarding Pledged Securities

In the last few months, the markets regulating authority Securities and Exchange Board of India (SEBI) has observed that the brokers were using the securities from the DEMAT of clients as collateral to settle their liabilities and dues.

Brokers have various liabilities and the assets they have are sometimes not enough to fund their needs. In that case they can use the securities of clients from the respective DEMAT accounts as a collateral to pay off their dues and get free from liabilities. They also use the securities by pledging them with Banks to raise capital for their own use, which is wrong. Since customers’ pledged securities can only be used by stockbrokers to give additional margins to the customers for placing trades. There are various brokers who are declared as defaulter by either of the exchange on account of pending liabilities.

What Has the SEBI Done to Rectify the Problem?

SEBI has taken various measure to prevent the use of securities and assets of securities and collaterals of the client by the broker. Some of the measures include early warning mechanisms to detect diversion of funds and securities of the clients. In its recent move, brokers have been restricted from pledging the securities of clients even if the client has consented for the same.

SEBI has passed an order to clearing corporations to share client level pay-in and pay-out obligations with depositories, and depositories are required to check the respective credit or debit in the DEMAT account of client. In case of any discrepancies found, the same should be immediately reported to the exchange.

SEBI has also developed an online system which will maintain a client level security holding register of every broker. All the data related to the securities is collected from various sources, including exchanges, clearing corporations and depositories. The balance of securities after analyzing all the transactions is computed and is then matched with the securities which the client is holding in his DEMAT. Any sort of mismatch is immediately reported to the exchange.

SEBI also has developed an in-house system to track the movement of the securities of client which are collected by the broker as collateral and flag an alert to the exchange if any diversion is noticed. These reports are prepared by the SEBI on a weekly basis and many diversion cases have already been identified and reported to the exchanges.

Conclusion

SEBI is taking all necessary steps to safeguard the securities and investment of all the traders and investors. There have been various measures taken by the governing authority to stop all the invalid, fraudulent and unlawful practices which can harm the investors financially and mentally.  It is also necessary for the investors to be aware of all the rules and regulations which have been enforced for them. With investment capital is at risk, but such fraudulent practices can further increase the level of risk associated with investments.

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Complaint Board
As On 31st March, 2020
Beginning of month Received during the month Resolved during the month Pending at the end of the month Reason for pendency
213 1 3 2 Closed by us, Filed ATR, SCORES approval awaited

Total clients served so far Total complaints received so far % complaint on customer base
70,000+ Customers 214 0.30%

Data is updated on 7th per month. It gets verified every quarter by independent auditor.

Data presented here is taken from company's inception

Importance given to satisfactory resolution as per prescribed TAT

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