Sebi cancels registration of 39 stock brokers: What investors must know

The Securities and Exchange Board of India (Sebi) recently cancelled the registrations of 39 stock brokers, seven commodity brokers, and 22 depository participants. This action was taken to prevent these entities from misusing their Sebi registration and to protect investors from potential risks, according to the market regulator. The brokers and participants affected were found not to be meeting the required registration conditions, particularly as they were no longer affiliated with any recognised stock exchanges or depositories.

Among the stock brokers affected are names like Bezel Stock Brokers, Reflection Investments, and Sumpoorna Portfolio. Commodity brokers such as Wealth Mantra Commodities and Sumpoorna Comtrade also had their registrations cancelled. Additionally, depository participants like Moongipa Investments and Punjab & Maharashtra Co-Operative Bank were impacted.

 

What does this mean for investors?

If you have investments with any of these brokers, you might be concerned about the status of your funds. However, the cancellation of their registration doesn’t necessarily mean that your investments are at risk.

"Sebi’s action primarily aims to protect investors by preventing these brokers from operating without proper oversight, as they were no longer members of recognised stock exchanges or depositories," explains Vatsal Gaur, Partner at King Stubb & Kasiva, Advocates and Attorneys.

The brokers were found not to be fulfilling the conditions stipulated under the Broker Regulations Rules of 1992. "Since these brokers were no longer holding membership of any recognised stock exchange, they no longer fulfilled the conditions required for registration under Sebi’s rules," says Abhiraj Arora, Partner at Saraf and Partners. This suggests that many of these brokers had little or no active business at the time their registrations were cancelled.

But if a similar situation affects you as an investor, what must you do?

If your broker’s registration has been cancelled, it’s important to stop all trading activities with them and avoid making any further deposits. You should contact the broker immediately to withdraw any remaining funds and arrange for the transfer of your securities to another registered broker.

"Investors should seek Sebi's guidance on recovering their assets. It’s also crucial to monitor their accounts closely for any irregularities during this process," advises Vinnaayak Mehta, Founder of The Infinity Group.

How does Sebi protect investors?

Sebi ensures that even after deregistration, brokers remain responsible for maintaining records, addressing investor grievances, and ensuring the smooth transfer of funds and securities to another legitimate broker or directly to the investors. This helps to safeguard investors' interests and ensures they can recover their investments without undue hassle.

If issues arise, investors can approach the concerned exchange or Sebi for assistance. "Sebi’s Investor Grievance Redressal Mechanism is a key resource for investors in such scenarios," says Gaur.

How can investors avoid such situations?

Choosing a reliable broker is important to avoid issues like these. "Investors should determine whether a broker is a discount broker or a full-service broker," says Mehta. Discount brokers might save on fees, but full-service brokers are often backed by stronger financial institutions, potentially offering more security.

Investors should also regularly monitor their trading activities and review contract notes and documents from their brokers. Any discrepancies should be promptly addressed with the broker’s grievance department or the relevant licensing authority.

Learning from the past: The Karvy Stock Broking case

The recent cancellations might remind some of the Karvy Stock Broking case, where one of India’s largest stockbroking firms misused client securities worth over Rs 2,000 crore. Sebi discovered in 2019 that Karvy had pledged clients' shares without their consent, leading to a big scandal that impacted investor confidence.

In November 2019, Sebi barred Karvy from taking on new clients, and by 2020, its registration as a stockbroker was cancelled due to violations of securities laws, including misappropriation of client funds. Investors who had their shares and funds with Karvy faced considerable challenges in recovering their investments

Recovery process for Karvy investors

1. Transfer of securities: After Sebi's intervention, the depositories (NSDL and CDSL) began the process of transferring the securities that were illegally pledged by Karvy back to the rightful investors' accounts. This was a significant step in ensuring that investors could regain ownership of their shares.

2. Claims through clearing corporations: Investors whose funds were misused had to file claims through the clearing corporations. The clearing corporations have a certain pool of funds that can be used to settle such claims, although the amount available is limited and may not cover all losses.

3. Legal actions: Some investors resorted to legal action to recover their funds, especially those whose investments were not covered by the clearing corporations' compensation mechanisms.

4. Intervention by banks: Some banks, which had extended loans against the pledged securities, worked with the depositories and Sebi to resolve the issue, allowing for the release of the shares back to investors.

Challenges faced by investors

Delay in recovery: The process took several months, and in some cases, over a year, for investors to recover their shares and funds, leading to financial stress and uncertainty.
 

Partial recovery: Not all investors were able to recover the full value of their investments. The process often resulted in partial recoveries, particularly in cases where the securities had lost value or were subject to litigation.

As of the latest updates, the majority of Karvy investors have received their securities back, but the recovery of funds, particularly for those who lost cash, remains a mixed outcome. Some investors continue to pursue legal routes or await further resolutions from the regulatory bodies.