In today’s stock market, traders are increasingly cautious about scams, price manipulation, and other risks. But what if your broker whom you trusted at the first step cheats on you?
This is something that happened with the clients of the stock broker Abhipra Capital Limited.
Recently, SEBI released an internment order against the broker, highlighting some of the critical violations. While the order targets breaching the regulations, going into the depths clears the picture of how it could impact retail traders and their trust in market participants.
Continue reading what SEBI uncovered in their investigation and key lessons that you can learn to safeguard your investments.
A Snapshot of SEBI’s Order
SEBI did an investigation of the compliance and operations between the period October 2021 and May 2022 and what came out is a life-long lesson for retail traders when it comes to choosing a stockbroker.
The regulatory body identified several violations, ranging from misuse of client funds to loans extended to unrelated entities.
The violations breached the Securities Contracts (Regulation) Rules, 1957 (SCRR), which strictly prohibit brokers from engaging in businesses unrelated to securities.
Below is the list of key violations by Abhipra Capital
- Misuse of Client Funds: Client money was not kept separate from the firm’s funds, raising concerns about potential mismanagement.
- Non-Segregation of Funds: Mixing proprietary funds with client accounts created systemic risks.
- Unconnected Business Activities: Abhipra extended loans worth ₹15.39 crore to 14 unrelated entities, exposing itself and its clients to financial risks.
- Negative Net Worth: The firm operated with liabilities exceeding its assets during the inspection period, further questioning its stability.
How Does This Impact Retail Traders?
Retail traders form the backbone of the securities market. However, violations like those uncovered in the Abhipra case raise the question of trust and the financial safety of retail traders.
1. Misuse of Funds:
Retail traders deposit funds with brokers to execute trades and manage portfolios. When brokers misuse these funds for unrelated activities, it puts the clients’ money at risk.
Such misuse of funds might delay withdrawals or, in extreme cases, a complete loss of funds can occur.
2. Non-Segregation of Funds
Brokers are mandated to maintain separate accounts for client and proprietary funds. By failing to do so, Abhipra exposed its clients to the risks of its proprietary financial activities.
Now in such a case, in the event of insolvency, client funds could be used to settle the broker’s liabilities.
3. Loans to Unrelated Entities:
Abhipra’s loans to 14 unrelated entities that had no connection to its securities business. These loans introduced financial liabilities that were not aligned with the firm’s primary obligations as a stockbroker.
Thus, retail traders are indirectly exposed to these risks. Further, if the broker faces losses in these activities, then it might result in its failure to fulfill the client’s requirements.
4. Erosion of Market Trust
Such mismanagement and scandals reduce the confidence and trust of retail traders in the market’s integrity. Retail traders, already cautious due to limited resources, may be discouraged from participating in the stock market which could impact liquidity.
SEBI’s Proactive Measures
In its order, SEBI has taken several steps to mitigate risks and restore confidence:
- Prohibition on New Clients: Abhipra Capital has been barred from onboarding new clients for one month.
- Asset Recovery: SEBI has urged NSE and BSE to ensure the recovery of outstanding loans.
- Surveillance Strengthening: Enhanced mechanisms to detect unusual activities in broker operations are being implemented.
These actions send a strong message to other intermediaries about the importance of compliance.
Lessons for Retail Trader
The Abhipra Capital case serves as a wake-up call for retail investors. While SEBI’s regulatory framework aims to protect traders, individuals must also take proactive steps to safeguard their investments.
1. Choose Brokers Carefully: Before onboarding with a broker, review their financial health, regulatory history, and compliance track record. You can check the active client base, and number of complaints on NSE, and further to check the types of complaints refer to SEBI’s SCORES platform.
2. Monitor Fund Allocation: Regularly verify that your funds and securities are appropriately credited to your accounts. Request account statements to ensure your money is being handled as per regulations.
3. Diversify Your Portfolio: Avoid keeping all your funds with a single broker. Diversify across asset classes and trading platforms to mitigate the risks of broker-specific failures.
4. Stay Updated: Follow market news and regulatory updates. Awareness of ongoing cases, like Abhipra’s, can help you identify potential red flags early.
5. Report Suspicious Activities: If you suspect any irregularities with your broker, report them to SEBI via the SCORES platform. Early reporting can prevent further misconduct and safeguard other investors.
Conclusion
The Abhipra Capital case underscores the importance of trust and compliance in the stock market ecosystem. While SEBI’s stringent actions are reassuring, retail traders must remain alert too.
By choosing reliable brokers, monitoring fund usage, and staying informed, you can protect your investments and contribute to a more robust and fair market.
In the end, transparency and accountability from both brokers and investors are essential for a thriving securities market. Let this be a reminder that your vigilance is your best defense.
