Exclusive: SEBI exploring unlimited cover for clients in case of broker default

Markets regulator SEBI is in initial discussions with brokers on how to wholly compensate the loss of clients of brokers who default. According to sources, the issue was discussed in a recent meeting of exchanges, brokers, and SEBI officials. The key point of discussion was the removal of upper cap of Rs 25 lakhs and fully compensating the clients' loss. SEBI has invited the exchanges and brokers to suggest measures to implement it. A source who was part of the discussion  said that the “option of insurance cover was also discussed but it will take some time to take shape” and in the meanwhile, investor protection mechanism of other countries would be studied.     

SEBI will discuss the issue further with stakeholders and may eventually come up with a consultation paper. According to market experts, the proposal will benefit high net worth individual (HNI) clients who are currently compensated as per the limit set by the exchanges under Investor Protection Fund. BSE has a limit of Rs 15 lakh per client and NSE’s limit is Rs 25 lakh per client.     

At present, major capital exchanges BSE and NSE's Investor Protection Fund have less than Rs 2500 crore — NSE has approximately Rs 1606 crore as of 30 April 2023 and BSE has Rs 855.28 crore as of March 31, 2023. After several defaults in the last 4-5 years, the issue of inadeqaute corpus of fund under the Investor Protection Fund was discussed and exchanges were asked to enhance the limit. After SEBI's review in FY 21, NSE had to contribute Rs 1822 crore to Investor Protection Fund.    

Exchanges have a mechanism to enhance the Investor Protection fund, these include contributions from sums received as penalties on brokers, penalties on listed companies, part of listing fees received, interest on some deposits of companies, part of transaction charges, etc. 

Ashu Madan, Managing Director & Co-Head, Business Affiliate Group, JM Financial Services, believes that “as per the current regulations and compliances it's highly unlikely that brokers will default, it’s virtually impossible.”      

Post Karvy Stock Broking episode, regulators and exchanges have taken several measures to ensure that no broker defaults, which includes steps like heavy margining and adequate collateral system. Segregation of client funds and securities, restricted movement of securities including pledge and re-pledge of securities and upstreaming of client money to clearing corporations has also been approved by SEBI.     

BSE and SEBI did not respond to Zee Business' queries, but NSE spokesperson said, "The discussions are being held between exchanges and SEBI to look into enhancing the compensation limits for investors. The removal of upper limit on compensation would create moral hazards and other issues."   

Most market experts favour enhancing the limit but are wary of the fact that in the past there have been instances where broker defaults looked orchestrated. Furthermore, the brokers convinced the client to not file a police complaint promising that compensation will be ensured through the exchanges.   

Another person pointed that when deposit guarantee cover for bank depositors is limited to Rs 5 lakh, how can unlimited cover be guaranteed for Investor Protection Fund, where maximum volume is generated in complex derivatives which are by nature highly speculative. 

With inputs from Tarun Sharma