Highest number of broker defaults cause crippling losses to investors

With broker defaults continuing, the industry has witnessed a record 28 defaults or expulsions since November 2019, just a little before the COVID-19 pandemic hit the world, MoneyLife reported.

This is the highest number of broker defaults in the past 20 years. Until then, there were 18 broker defaults on the National Stock Exchange (NSE). If the brokers have a membership of the Bombay Stock Exchange (BSE), they are suspended by that exchange too.

Ten more brokers have been defaulted or been expelled by the NSE between December 2020 and July 2021. Of these, five have been expelled by the BSE too.

The report said that most defaults have inflicted crippling losses on investors, although the settlement guarantee ensures that there is no impact on the market itself.

In many cases, brokers used investors' shares to obtain leverage and take speculative positions on the derivatives market, leading to losses.

Sometimes, they passed back a small interest for the pledged shares, but in many cases, investors were unaware of their shares being pledged.

For instance, in 2019, Karvy Stock Broking was banned by the Securities and Exchange Board of India (SEBI) for defaulting clients of around Rs 2,000 crore, making it one of the biggest such cases in India.

Among the recent expulsions are Sumpoorna Portfolio, Action Financial Services, Reflection Investments, Bezel Stock Brokers Pvt Ltd, Conard Securities Pvt Ltd, Arcadia Share and Stock Brokers, Star Share and Stock Brokers, and Stampede Capital.

This list does not include two firms, which abruptly closed their capital market business on their own accord. One is IndiaNivesh, whose voluntary closure has led to litigation between HDFC Bank and Edelweiss Custodial Services, exposing the shady practice of 'funded fixed deposits' being accepted by the clearing corporation as collateral, the report said. In this case, the dispute is over a Rs 100 crore funded FD, which the HDFC Bank refused to honour.

The other is Action Financial, which initially claimed to have done a voluntary closure but was later expelled by the exchange since it had failed to refund investors' money.