What happens if a stock broker goes bankrupt or out of business? what happens to your trading account balance and shares in your account?
There comes the question that, what is the role of the broker in the stock market industry.
A stockbroker is a professional or an organization that acts as an agent/ middleman between the buyers and sellers in the stock market. Stockbroker facilitates the buying and selling of stocks, debentures, ETFs, etc from the stock exchange.
Stock brokers help us to buy and sell shares through their platform but that doesn’t mean our broker owns any of that. Indian stock market is regulated by SEBI (Securities and Exchange Board of India) with strict regulations. SEBI will always keep a close eye on the stock broker’s actions if any suspicious activities are found then actions will be taken.
What are the Conditions to be a Stock Broker In India?
To qualify as a stock broker in India
- They have to undergo multiple investigations and inspections.
- Pay an enormous entrance cost.
- Mandatory financial disclose at SEBI strandings.
- Compulsory and regular audits and inspections will be carried out over the financial transactions and the audit books.
- If the client does not use their trading account money in three months the stockbroker is not allowed to be the custodian of that fund.
- A stockbroker has no rights over the stocks placed in your Demat account.
- It is mandatory to consult the owner before moving the stocks at every new opportunity.
- In many cases they often asks for the power of attorney for the quick management of the stocks, in that case even if you provide them with one, it is necessary to keep an eye on them
- A stockbroker is under obligation to provide you with the transaction details regularly. Any failure to present the detailed report should be taken into serious account.
What Happens to your Stocks if Stock Broker goes Bankrupt?
If a broker firm goes bankrupt, the investors don’t have to worry about stocks held in their accounts. Because all the shares that bought are actually kept securely with depositories (CDSL and NSDL).
National Securities Depositories Ltd (NSDL) and Central Securities Depositories Ltd (CDSL) are the are depositories registered by the Indian government to hold multiple forms of securities like stocks, bonds, ETFs, and more as electronic copies.
So even if stockbrokers go bankrupt, our stocks will be safe with depositories.
What Happens to your Fund Balance if Stock Broker goes Bankrupt?
The stock market active participants (traders) always have huge amount in their trading account. If stock brokers goes bankrupt, then they may lose this amount. So to protect investors and traders from this risk, SEBI created a fund called Investor Protection Fund (IPF).
- If the claim is filed immediately, then the trader can get compensated up to 15 lakhs by the IPF.
- If filed within 3 years of the bankruptcy, then the compensation amount is determined by the IPF.
- Any claims raised after three years are invalid and you will become illegible for the compensation.
Even though you followed all the precautions and care there are conditions where your stock can drown with the broker, in the case of forgery and malpractice from the side of the broker.
Some bankruptcy cases in India
| Date of bankruptcy declaration | Brokerage firm |
| December 2004 | Alba Capital Markets P Ltd. |
| July 2007 | Madan & Co. Ltd. |
| September 2008 | Himgiri Fincap Ltd. |
| September 2008 | Kass Securities Pvt. Ltd |
