Investing via a broker? Don't leave unutilised funds in the trading account

If you follow news of the fines imposed by the Securities and Exchange Board of India (Sebi) on brokers, it will give you a good idea of the shenanigans they indulge in. Last week, the market regulator fined Anand Rathi Rs 100,000 for violating stockbroker norms and transferring money from clients' accounts to its own and vice versa on several occasions.  

Sebi rules state that brokers must segregate clients' funds from their own. "When a broker opens a bank account where he intends to keep clients' money, even the title of the account has to indicate that it is a broker-client account," says Venu Madhav, chief operating officer, Zerodha. 

This serves another purpose as well. "The exchange has a lien on clients' bank account. If a broker defaults, the exchange can use the funds in clients' account to pay them," says Vikas Singhania, executive director, Trade Smart Online.

The regulator does, however, allow brokers to transfer money from clients' account to their business account for legitimate purposes, such as to pay the exchanges, pay brokerage fee and securities transaction tax (STT). 

"If the amount transferred from the client account to the broker's business account is more than the broker can justify in case of an audit, that amounts to a breach of regulation," says Shrey Jain, founder, SAS Online, a Delhi-based discount broking firm. 

The idea behind creating a firewall is to prevent misuse of funds. "The broker has full access to your money. Sebi does not want brokers to pull out clients' money and use it to fund their own trades, buy real estate, or use it for personal purposes, as has happened in the past," says Madhav. 

A few months earlier, Sebi had slapped a fine of Rs 1.1 million on A C Choksi Share Brokers. In that case, Sebi had observed that the broker had mixed its own securities with those of its clients. Sebi rules state that similar segregation (as for funds) has to be maintained for securities, too. 

"In the case of long-term investors, securities keep lying in their demat accounts for years. The risk of securities being misused is actually higher than that of funds," says Singhania. The broker may sell or pledge those securities.  

According to brokers, Sebi is working on introducing changes so that in future, shares will be transferred directly from the client's demat account to the exchange's account (instead of going through the broker's account, as happens at present). 

In the Choksi case, Sebi also found that the broker had failed to settle the running accounts of clients. Suppose that you have transferred money to your trading account but did not use it to buy securities. The broker could misuse this money. To prevent this, Sebi has introduced a rule that once every 30 or 90 days (depending on what the customer had agreed to at the time of opening the account), unutilised funds have to be transferred back to customers. 

Experts say that the broker is the custodian of your funds and securities, so you must choose one carefully. Madhav suggests that you should look up the financials of the broker and avoid those who are not doing well. 
 

Jain suggests looking up the National Stock Exchange's website and avoiding brokers who have a large number of complaints against them. He adds that if a broker is having difficulty in paying you money, it signals trouble and you should pull out your funds immediately from him. Singhania suggests not allowing money to lie idle in your trading account and monitoring your portfolio regularly.      

Investors' money used for circular trading   

• It suggests trading among related parties to create artificial volumes in a stock and jack up its price
• These days unsolicited stock tips are sent via SMS. When people see the prices of such a stock rising, they buy it, after which the operators dump the stock
• The lay investors bear the losses   
• Avoid falling prey to such scams by staying away from stocks with poor fundamentals