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What Happens If Stockbroker Shuts Down? – FAQS

  • Rudri Rawell
  • Jan 14 2022
  • 6 minutes
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It is often thought that the first step for investment in stock markets is learning about them and gaining maximum knowledge about every nuance related to them. However, it is also equally important to select the right stock broker to open your portfolio. It is the primary requirement for any investor or trader to start their portfolio. 

A good stockbroker can help build a portfolio into a profitable one and generate maximum wealth for the investor. Therefore, it could be a major concern for many investors when their stockbroker goes bust or is shut down due to various reasons. The primary concern of investors in such a case will be ‘what will happen to my portfolio?’

Given below are the answers to this basic question and a few relevant details regarding the same. 

Who is a stockbroker?

To address the question mentioned above, it is important to first understand the meaning of the term ‘stockbroker’. A stockbroker is a person or a business entity that has a license from SEBI to carry out trades and investments on behalf of the investors and traders and charge a nominal fee for the same. A stockbroker is a person or a business registered with a recognized stock exchange. 


Since stockbrokers make investments on behalf of the investors, SEBI has imposed many rules and restrictions on them for every aspect, right from registration to handling of individual portfolios to protect the investors’ interests. Some of these rules include the entrance fees to be paid, permission to be taken from investors and traders to handle their portfolio, providing regular statements to the investors as well as to SEBI as per their regulations, etc. 

What happens when a stockbroker shuts shop?

Despite many rules and regulations that have been imposed on stockbrokers, there could be a chance where they may have to shut down their operations and close all the portfolios held by them. The main reason why a stockbroker is forced to shut down their business is when they violate any rules and regulations set by SEBI or the stock exchange. Some of the occasions that may warrant the stockbrokers to close their operations are,

  1. When the stockbroker does not transfer the funds related to the portfolio to the respective investors or traders.
  2. When the stockbroker enters a transaction without the permission of the investors or traders. 
  3. When the stockbroker has used the client’s funds and their account to do personal trading and earn profits from the same.

If the stockbroker has defaulted any of the above rules set by SEBI and stock exchange, they are derecognized from the stock exchange and are declared to be a defaulter. They will have to face the necessary penal actions set by SEBI. 

What are the consequences when the stockbroker shuts down?

The biggest fear for an average investor or trader when a stockbroker shuts down is the loss of their investments and the profits earned by them. However, it should be noted that when a stockbroker’s business is shut down due to any reason, the portfolio of the individual investors and traders is not harmed and is absolutely safe. The consequences of such an event and its impact can be explained in the following situations. 

a. To shares in Demat account

The shares of the investors or the traders held in the Demat account are essentially the shares that are held in digital form with the Depositary. The two depositories in India are the NSDL and the CDSL. The stockbrokers do not have any hold on the client’s shares held in their Demat account. Upon closing of their business, these shares can be transferred to any other brokers or brokerage firms as per the discretion of the investors or traders. 

b. To trading account

When a trader has a trading account with a stockbroker that has shut down, they can apply for compensation from the Investor Protection Fund (IPF) set up by SEBI. traders need to apply for a claim at the earliest when the stockbroker has closed operations. A few points to be considered in this regard are highlighted below.

  1. The trader can get compensation up to Rs. 15,00,000 from the IPF when the claim is filed immediately.
  2. When the claim is filed within 3 years of the stockbroker closing their operations, the claim amount to be sanctioned is determined by the IPF.
  3. When the claim is filed after a period of 3 years, the trader will not get any compensation from the IPF.

c. To mutual funds

Similar to the Demat account where the shares and securities are kept with the Depository, the units of the mutual fund of the investor are held with the Asset Management Company (AMC). Hence, the units of mutual funds are also safe and are not affected if the stockbroker shuts down. 

Conclusion

Stockbrokers are intermediaries that invest and trade in various shares and other securities on behalf of their clients. They are not authorized to carry out any transactions without the permission of their clients. Hence, when the stockbroker goes bust, the client’s shares and mutual funds are kept safe with the depository and the AMC respectively. The only matter of concern is with the client’s trading account. So they have to apply for compensation with the IPF at the earliest to safeguard their interest. 

FAQs

Can an investor or trader file a complaint against the stockbroker for any of their wrongdoings?

Yes. SEBI has provided many safety measures for investors and traders to safeguard their interests. They can file a complaint with SEBI and the respective stock exchanges for remedial actions.

Can unutilized funds in the traders’ account be used by the stockbroker?

No. The unutilized funds in the traders’ accounts cannot be used by the stockbroker. They have to be transferred to the trader’s primary account within 30 days or 90 days at the discretion of the trader.

When should the stockbroker provide their client’s the details of their account?

Stockbrokers are obliged to provide their clients with the details of their accounts at regular intervals as well as whenever demanded by their clients.

Is it necessary for the stockbrokers to be registered with the recognized stock exchange?

Yes. It is mandatory for the stockbrokers to be registered with the recognized stock exchange. This will also help in safeguarding the interests of the investors and traders.

 What is the minimum compensation that can be given against a single claim of an investor for any default of a broker?

The minimum compensation that can be given against a single claim of an investor for any default of a broker is Rs. 1,00,000 in case of a recognized stock exchange (NSE and BSE) and Rs. 50,000 in the case of other stock exchanges.

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