Broker defaults near 20-year high amid slowing economy hit by Covid-19

The recent economic pain, compounded by Covid-19, has left a string of brokerages unable to meet their obligations. The National Stock Exchange has declared 15 brokers as defaulters since September 2019. The BSE has 14 defaulters, with most being  common to both exchanges.

The total number of such defaults between September 2019 and September 2020 is almost higher than the sum of the previous 10 years’ defaults on the BSE. It exceeds the sum of all brokerage defaults on the NSE over around the previous 15 years.

Some recent defaulters were Modex International Securities, Vineet Securities, Grovalue Securities, Quantum Global Securities, Wellindia Securities — all of them declared defaulters after the nationwide lockdown was imposed to contain the spread of the Covid-19 pandemic. Modex was the latest addition to the list, declared a defaulter by NSE on September 15 and BSE on September 18.

This rise could have been the result of unethical practices, losses in proprietary accounts, using client securities to raise funds, and regulatory tightening by the Securities and Exchange Board of India (Sebi), which helped unearth many issues, said Anup Khandelwal, president of Association of National Exchanges Members of India (ANMI), in an emailed statement.

“Various new regulatory measures introduced by Sebi in the recent past were instrumental in unearthing unfair trade practices by a few and finally resulted in defaults,” he said.

The regulator has been tightening norms to protect investors. It came out with a standard operating procedure to deal with defaults on July 1. This included looking at early warning signals, such as an increase in investor complaints or shortage of funds, before initiating action such as freezing bank accounts. This came into effect from August 1.

Many investors who were caught by surprise by the defaults have had a hard time getting their money back. A police investigation must be completed before other steps on compensation can be undertaken.

This has been particularly slow amid the Covid-19 pandemic, according to Hinesh Doshi, vice-president of the Sebi-recognised association Investors Grievances Forum. “They are going from pillar to post,” he said.

Some have decided to turn away from smaller brokerages in favour of larger players, according to him. This is borne out by an industry report from rating agency ICRA.

“The increased regulatory oversight, coupled with the cost of implementing the processes, may also act as a deterrent for smaller brokerage entities and is expected to result in consolidation in the industry. Larger and well-established brokerage companies are expected to garner market share. 

Over the long term, stronger regulatory framework is expected to strengthen industry structure and improve financial discipline, which is critical, given the fiduciary duty of broking entities,” said the ICRA report authored by Karthik Srinivasan, Samriddhi Chowdhary and Sainath Chandrasekaran.

The report highlighted the consolidation underway in the industry — larger players with lower rates have been gaining market share. The brokerage industry’s aggregate income is said to have grown around eight per cent to Rs 21,000 crore in financial year 2019-20 (FY20) according to ICRA’s estimates.

The BSE declined to comment. The NSE, the Bombay Stock Exchange Brokers’ Forum (BBF) and the brokerages named did not respond to an email seeking their comment.