A number of times we hear that a brokerage has shut down or it is about to be closed. This may be scary for you if you are using the services of that brokerage. Do you wonder what happens to your shares now? Are your funds safe?
In short, YES! Your stockbroker cannot take your money and shut it down. There are a number of regulations in place to stop that from happening and to make sure your investments are safe.
A brokerage can shut down for many reasons like canceling its license or if it has defaulted or it can be a voluntary shut down. The good news is that you do not have to worry about your shares in this case.
It is important to understand that brokerages are just intermediaries. They do not have direct access to your funds or shares.
What happens to your shares
In the case of shares, you must note that once bought, the shares do not stay in your trading account that is opened through the broker but in your Demat account. Your Demat account resides with the depositories NSDL and CDSL which are created under the Ministry of Finance.
So your brokerage account just facilitates the buying and selling of shares as per your wishes. They do not hold your shares at any point. Also, your funds stay in your bank account which is linked to your trading account. So it will not be possible for your broker to steal your money or your shares in case of a shutdown.
All your holdings remain safe in your Demat account which cannot be accessed by the broker. In a case like this, all you have to do is open another trading account with a reputable brokerage and transfer your holdings to your new broker. You will see that all your shares are intact.
What happens to mutual fund holdings
Mutual funds are a part of asset management companies (AMCs), here also brokers are intermediaries that introduce you to the MFs and facilitate the buying or redemption of units. So your units remain safe at the AMC, even if your brokerage shuts down.
Investor protection Fund
To protect the investors, Market regulator SEBI has already created a fund called investor protection fund. If your brokerage goes bankrupt or shuts down, you can file your claim through this fund.
If you file immediately, you can get as much as ₹15 lakh in compensation. If you file within 3 years, the amount of compensation will be decided by the IPF. But you will not get any compensation if you file a claim after 3 years.
Key things to keep in mind if your broker has shut down:
1) If you have an inclination of something like this happening, start the process of moving your funds to another broker.
2) Avoid any fresh trades from your brokerage account.
3) A broker cannot complete any transaction without your approval, so keep an eye for any incomplete or fake transactions.
4) You can ask for your trading reports from your broker any time and your stockbroker cannot say no.
5) In case of any pledges, you cannot close your account till that is settled.
6) Keep records of all Demat holding statements, account statements to avoid mismatches when you close your brokerage account.
It is true that brokerages make trading easy, but it is important to not trust any brokerage with your eyes closed and do thorough research before opening an account with them.