There has been a rising case of broker default. Since 2019, more than 30 brokerage firms have been expelled from the exchanges. Action Financial Services (India) Ltd is one such firm. Action Financial Services (AFS) is a publicly-traded brokerage firm based in Mumbai. The company defaulted in October 2020 and was expelled by the NSE. You can choose a discount broker to start trading in India.
Brokerage firms defaulting are a nightmarish scenario for investors. The AFS default left its investors hanging, with several having difficulty accessing and withdrawing their funds. In this article, we will examine what happened to Actional Financial Services and how to withdraw your funds if your broker defaults. Further, we will discuss some proactive measures that you should undertake to avoid the default of your brokerage firm and SEBI’s measures to prevent this.
What happened to Actional Financial Services (AFS)?
Action Financial Services (India) Ltd. shut down its business operations in October 2020 and was declared a defaulter on 22 January 2021 by the NSE. The NSE website listed the following reasons for AFS default and resulting expulsion:
- Misappropriate use of clients’ securities,
- Inadequate clients’ funds,
- Failure to settle clients’ accounts,
- Incapability to maintain net worth,
- Submission of incorrect data and statements, and
- Non-observance of clients’ grievances
All of these resulted in the NSE serving a notice on 23 January 2021, informing the company’s stakeholders of the company’s default and expulsion.
What to Do If Your Broker Defaults?
Nobody wants to hear that their brokers have defaulted. However, if you are among the unlucky few, you should know the following:
First of all, you will not lose any invested securities. They are stored safely and held by the depositories: CDSL or NSDL. The main thing you must focus on is the fund you have in your trading account. To reclaim such funds, you must file a compensation claim under the Investor Protection Fund (IPF). The IPF was established by the SEBI to address any such compensation claims. You can file this claim within three years of the default.
If your broker is defaulting, contact the investor service cells of the exchanges. Your grievance hasn’t been resolved within 15 days, the exchanges will transfer your grievance to the Investors’ Grievances Redressal Committee (IGRC). If you are not satisfied with the resolution passed by the IGRC, you can further file for an arbitration process.
Proactive Measures to Avoid the Default of Your Brokerage Firm
- Trade and invest only through SEBI-registered brokerage firms. To ensure the reliability of your brokers, SEBI has put in place various barriers to entry like high entry fees.
- Request a contract note for each transaction and verify the contract details. Check details like transaction price, date, time, etc.
- Check whether your account reflects transactions carried out by you within 48 hours.
- You can also ask your brokerage firm to send you periodic statements of account.
Practicing all the above steps ensures that your broker conducts business as usual. Also, you can take action instantly at any sign of trouble.
Measures Taken Up by SEBI to Prevent Brokers’ Default
The SEBI is responsible for the Indian capital markets. In an action to prevent the numerous recent occurrences of brokers defaulting. The SEBI has adopted the following policies:
- High entry fee: In order to become a SEBI-registered broker, a large amount of capital is required. This barrier to entry prevents entry of any undesired entity.
- Permission from investors/traders: Brokers must seek approval from the investor/traders to carry out and complete any transactions.
- Periodical statements: Brokers must oblige investors’ and traders’ requests for periodic account statements. This is necessary to prevent any fraudulent activities from occurring.
Brokerage firms defaulting has big repercussions in the industry: Indian financial market. This lowers the investors’ confidence in the market, resulting in low market participation. Low market participation harms the economy’s growth prospect. Therefore, SEBI needs to be proactive and deal with this scenario. Additionally, as an investor, you can follow the mentions in this article to avoid defaulting brokers.