Here's how you can ring-fence your funds and securities from brokers

If you leave too much money lying in your trading account or hand over your securities to them, there is always the risk that they could use them to trade in the markets

Biplab Sen (name changed on request), an Odisha-based investor, is one of those who has lost money due to F6 Finserve, a Gurgaon-based stockbroker, defaulting on payouts to clients. Sen had the first inkling of trouble when his trading terminal stopped working early in February. When he called up the broker, he was told that there were technical problems which would be resolved soon. Despite a long wait and repeated phone calls, the terminal did not resume functioning, and later the broker too stopped responding. Subsequently, the Bombay Stock Exchange declared F6 Finserve a defaulter. The 90 clients of this broker that Das is in touch with have lost an estimated Rs 100 million. Total defaults are estimated at more than Rs 1 billion. It is suspected that the firm’s promoters sustained losses in the markets, then tried to recover their money by trading more with clients’ cash and shares, but failed. They are now absconding.

Transferring shares to brokers is risky: One reason such shenanigans occur is that clients sometimes agree to transfer securities from their demat account to the broker’s pool account. “Clients do so because brokers promise them an interest rate of 7-10 per cent for keeping their securities in the pool account,” says Jatin Khemani, founder and chief executive officer, Stalwart Advisors, a Sebi-registered independent equity research firm. By keeping more shares in his pool account, the broker can take bigger positions in the futures and options (F&O) segment. “But the F&O segment is inherently volatile. One wrong investment decision can take the broker down. And if he has pledged your shares, you stand to lose too,” says Khemani. 

Sometimes, clients also keep their shares in the broker’s pool account to get higher margins for the trades they wish to execute. They give stocks instead of cash. Such handovers can prove risky.

Keep a tab on money in trading account: The broker has access to any money lying in your trading account. Those who trade regularly have no option but to keep considerable sums in their trading accounts. The only precaution they can observe is to keep a close tab by checking their accounts regularly. Buy-and-hold investors, who don’t need the money daily, should transfer any excess sum to their bank account at the earliest. 

How to lodge a complaint in SCORES

• First approach the listed company or registered intermediary for redressal of complaint
• If this entity rejects the complaint, or does not respond, or if you are not satisfied with the reply, lodge a complaint on SCORES
• From August 1, 2018, investors will have to lodge a complaint on SCORES within three years from the date of cause of complaint
• File your complaint by going to the Sebi website, and then to Investor corner/complaint registration
• A PDF document of up to 2 MB size can also be attached to support the complaint
• On successful submission, you will get a unique registration number, which should be mentioned in future correspondence
• If you are not able to register a complaint online, send it by post to any of the Sebi offices

 

Many brokers do proprietary trading, which means that they use their firm’s capital to trade. “Ideally there should be a firewall between clients’ money and the firm’s capital, but this is not always maintained in the real world,” says K Vaidyanathan, lecturer of finance at the Indian School of Business. The moment the broker sustains losses in proprietary trading, the temptation to use the funds or securities belonging to clients becomes too great. It is best to keep both out of his reach. 

Don’t let a broker trade on your behalf: If the broker’s relationship manager asks you to allow him to trade on your behalf, and promises a high rate of return, reject such suggestions outright. The broker’s job is to execute buy and sell orders on your behalf. “Don’t give power of attorney (PoA) to your broker to trade,” says Sandeep Parekh, founder, Finsec Law Advisors. He informs that if a PoA was given inadvertently at the time of filling up the form, it could be revoked at any time. According to Vikas Singhania, executive director, Trade Smart Online, “If you need help regarding where to invest, take the mutual fund route, or pay a fee to a Sebi-registered investment advisor (RIA) who deals in stocks.”   

Give limited PoA to broker: When you sell shares, those shares have to be taken out of your demat account and handed over to the exchange. One way you can give your broker the power to do so is by filling up a physical slip. For most people, and especially those who trade frequently, this can prove cumbersome. So clients give a PoA that allows their broker to handle this task. “Clients should give limited purpose PoA so that the broker can only transfer shares from their demat account to the exchange, and nowhere else,” says Shrey Jain, founder, SAS Online, a Delhi-based discount broking firm. 

Monitor your investments: Each time you buy or sell a share, you receive an SMS message both from the stock exchange and the depository. The broker also sends a contract note at the end of the day. Study these documents closely. If transactions have occurred without your permission, get in touch with the broker immediately. “If you trade directly, you must take time out to go through the documents and SMS messages,” says Singhania. 

Complain at the earliest: Mechanisms for redressing investor grievances are available both with the stock exchanges and the Securities and Exchange Board of India (Sebi), the market regulator. An exchange can impose penalties on the broker. If widespread fraud is suspected, it can send a team to examine the broker’s books, and in extreme cases, suspend his membership. If you are not satisfied with the exchange’s actions, complain to Sebi either online via SCORES (Sebi complaints redress system) or at one of its regional offices.

Choose your broker with caution: If you look at the list of brokers who have defaulted on client payouts in the recent past, most of them are smaller or medium-sized entities. Hence, it may be wiser to stick to one of the national, or better known, entities. If you decide to go with a smaller entity, get word of mouth feedback from a number of people about his professional integrity. Also, check for how many years the broker has been in this business. If he has survived several market cycles, it is a sign that his systems are robust. The NSE lists both the number of clients that a broker has and the number of complaints against him. If the proportion of complaints to clients is high, avoid that broker. Finally, run an online check on the broker’s reputation.