If you are trading in the market, the stock broker or the brokerage house is connected to you like an umbilical cord. What do you do if this cord is feeding you poison or itself taking away all the nourishment?
That’s how thousands of retail investors are currently feeling – severed and hurt, losing faith in the very ethos of investing.
Yesterday, the NSE expelled two brokers, viz., Kolkata-based Destiny Securities and Mumbai-based Star Share & Stock Brokers from its membership while declaring these brokers as defaulters.
And prior to this, it had declared as defaulter and expelled Mumbai-based Arcadia Share & Stock Brokers Pvt Ltd. Arcadia's managing director (MD) Antony Sequeira and director Narendra Brahmbhatta are disqualified by NSE from holding any position as director or partner in any listed company.
These are not one-off incidences – this is now happening on a regular basis. In fact in 2020, 18 brokers defaulted on the NSE while 16 on the BSE - the highest number of broker defaults in the past 20 years and the highest since the Ketan Parekh scam of 2001-2002 and the dotcom bust.
Apart from Karvy, whose default shook everyone to the bones, the others to be debarred are BMA Wealth Kreators, Allied Financial Services, Fairwealth Securities, IL&FS Securities, Amrapali Aadya Trading & Investments, Kassa Finvest, Unicorn, Vasanti Securities, Click-2-Trade, Anugrah, Arcadia, and IndiaNivesh.
There is now a growing list of brokers facing complaints of default or misuse of clients’ securities. Many have been declared defaulters, but a few are still under the scanner or on the list of potential defaulters.
These brokers are using shares of their clients to take speculative positions in the derivatives market, obtain leverage and many times, they have even pledged investors shares.
The list is only growing and this could be much more than the Rs.1500 crore investor protection fund maintained (IPF) by the NSE and the BSE. The objective of the IPF is to use the money to fully reimburse all clients when brokers default.
What is shocking is that Advocate Ravichandra Hegde, during the Karvy and Anugrah investigations, found that the settlement guarantee fund, has not been used even once in two decades. They also found that clearing brokers have been liquidating illegally pledged investors security, probably under pressure from clearing corporations not to touch the settlement guarantee fund. So then, what is the use of this fund at all, when investors continue to be hoodwinked right under the nose of the very authorities who are supposed to protect them? Increasing the fund kitty is meaningless and just an “act” to show that things are being done, just ticking the boxes.
This is a huge risk for clients, who use brokerages to trade, thinking that they are protected by the stock exchanges and SEBI. They think these authorities are doing their due diligence and will have the systems in place to forewarn in case they spot any discrepancy. But sadly all three wake up only after the robbers have looted and scooted, like the police arriving on the scene after all is done in the old Hindi movies.
What is even more shocking is that despite everything now digitized, none of the authorities can neither give out the exact number of clients impacted nor the figure of default till date.
What will happen here also is that smaller brokerage houses will get shunned by retail investors and the bigger ones will gain strength; consolidation is happening in this sector too. Larger brokerage houses are bound to gain more market share.
Default by brokerages is a failure of the monitoring authorities and they need to get more vigilant and do what they are supposed to do – protect the investors.