Broker misutilising your securities? Here is how to detect malpractice and save your investments

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Published: November 27, 2019 2:39:03 PM

Equities are sophisticated investment and investors need to have knowledge, experience and time to study the investment portfolio and market movement for taking proper investment decisions.

equity, equity investment, stock broker, misutilisation of securities, Demat account, depository participant, BSE, NSE, DP Holding Report, CDSL, NSDL, CAS, NBFCs, SEBIAs a majority of retail investors don’t have time and expertise, they rely on brokers to manage their investments.

Despite market risks, equity investment is considered superior compared to other fixed-income investments, because of its ability to beat inflation convincingly by generating higher long-term returns. However, equities are sophisticated investment and investors need to have knowledge, experience and time to study the investment portfolio and market movement for taking proper investment decisions.

As a majority of retail investors don’t have time and expertise, they rely on brokers to manage their investments. However, by convincing unsuspecting investors of higher returns, may brokers do transfer securities of such investors in their own account for the purpose of giving them margins to trade.

Lately, without the knowledge of investors, many of such brokers have pledged these securities with non-banking financial companies (NBFCs) and the funds acquired from the NBFCs were misutilised for the purpose of trading in securities or investing in other assets in their proprietary book.

After some of the brokers suffered heavy losses in their books, the pledged securities were sold by NBFCs to recover the loans, resulting into the wipe out of investments that were entrusted to the brokers by the investors.

The wrongdoings of these brokers through misutilisation of clients securities and clients money have left the trust of lots of investors shaken.

In case you are also relying on brokers to get your equity investments managed, the big question is: how to detect if the broker is misutilising your investment or not?

To get the right of share broking, intended brokers need to register themselves as depository participant (DP) with a stock exchange, e.g. BSE, NSE etc. You may access and study the DP Holding Report, in which you can see Free Quantity and Pledged Quantity separately to check if any of your securities is unauthorisedly pledged.

Generally large stock brokers maintain such reports on their website and provide access to such reports to the clients either generously or on demand. You may either get access to the broker’s site for the DP Holding Report or may get yourself registered with CDSL/NSDL to view the holdings online directly in the Depository system.

Apart from these, ensure that your mobile number is updated in your Demat account, so that you may get an SMS from the depositories. This is because depositories like CDSL and NSDL send SMS to the registered mobile number of the clients for any debits done from the clients’ Demat accounts.

Also, study the Consolidated Account Statement (CAS) that CDSL and NSDL send through email/physical mode on a monthly/half yearly basis to check the free and pledged quantity of securities.

In case you discover that some securities are unauthorisedly reflecting under the pledged quantity of securities, raise the issue with the broker immediately to make them free and to ensure that you don’t end up losing money due to the malpractice of the broker.

In case of non-compliance, you may bring it to the notice of the market regulator Securities and Exchange Board of India (SEBI).

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