Act fast if your broker is shutting shop

Investors must withdraw funds, open a new trading account and transfer assets.

Many investors prefer dealing with small brokers, as the investor talks directly to the owner and not a representative who might change every few months.

There’s trust between the parties.

But, many such intermediaries have been going out of business because of an increase in compliance and technology costs, coupled with low market volumes.

According to the Securities and Exchange Board of India (Sebi), the number of brokers nearly halved last year, from 6,147 to 3,187.

If your broker decides to shut shop, migrating to a new one is not difficult.

You need to get your paperwork right. Sebi has specified the procedure in case a broker winds up business.

The broker needs to convey the decision to the client and exchanges at least a month in advance, according to Vikas Singhania, executive director at Trade Smart Online.

Also needing to ensure all sub-broker registrations are cancelled, all connectivities are surrendered and all dues in respect of clearing houses have been cleared.

“Exchanges issue a public notification of such request for closure in leading newspapers, with a cooling period of two months, within which time investors can make claims. If no claims are received, the exchanges send the application to Sebi for closure,” says Venu Madhav, chief operating officer at Zerodha.

As soon as you are intimated by the broker, use the cooling period to migrate to a new one.

First, square up all your open positions and withdraw funds from the trading account.

Open a trading account with another broker. Then, apply for transfer of holdings with the first broker.

Your demat account could be with either Central Depository Services (CDSL) or National Securities Depository (NSDL).

If the new broker has the same service provider, you can go online and electronically transfer the shares on your own.

If you are transferring assets between CDSL and NSDL, you have to fill a physical form and submit it to your first broker.

If you are closing the account, there is no transfer fee. If you keep the account with the first broker active, there can be a charge of around Rs 25 for each company.

“If the investor doesn’t act in time, typically, the broker shutting shop does a bulk transfer to another intermediary and informs the client,” says Singhania.

Though brokers are tightly regulated, there have been instances of brokerages shutting down because of a default.

“In such cases, if a client isn't able to realise his or her fund or securities, then the person may file a complaint against such brokers. Sebi provides a facility called Scores (Sebi Complaints Redress System) where one can file a complaint online,” says Madhav. 

Investors also have an option to approach exchanges, which are required to maintain an investor protection fund with the objective of compensating investors in case of defaults.

The procedure, however, is long, according to Singhania.

He says, after the complaint exchanges investigate, and if there are irregularities, they first try to recover the money from the broker’s assets and deposit.

If the money still falls short, the Investor Protection Fund Trust’s committee decides on the compensation.

Investors are paid either to the extent of default or a maximum of Rs 15 lakh.

Photograph: Reuters