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Home > Business > Special

Dealing with your stock broker? Remember this!

October 25, 2007

The agreement between you and your broker is skewed towards the broker. When you sign, what you effectivelly do is sign away many of your rights. But, is there any recourse?

The most important document, when it comes to offline and online trading in shares, is perhaps the agreement you sign with your broker, called the member-client agreement. But many of us sign this document without reading it fully. We highlight eight things that get lost in the fine print and subject you to the whims and fancies of the broker.

1. You allow your broker to restrict your access to trade through their website at any time with no notice or warning. If you incur any loss because of this, well, that's your problem, not the broker's.

The Indiabulls [Get Quote] agreement, under the heading Restriction on access to web site and trading, says "the client understands that the member may at any time, at its sole discretion and without prior notice to the client, prohibit or restrict the client's access to the use of the website or related services and the client's ability to trade."

2. In fact, the broker cannot be held responsible even for the basic broking service. Your broker has the right to cancel an order you placed.

ICICI [Get Quote] Securities' agreement says on page nine that "the client is...also aware that the stock broker has the discretion to reject the execution of such orders based on its risk perception".

3. Trading on margin money is a grey area. If your margin is insufficient at the closing of the market, your broker has complete authority to sell your shares without even informing you. If this results in losses, you bear them. Entirely.

In fact, this scenario was played out in May 2004 when markets fell sharply. The stock exchanges responded to the fall by doubling the margins. Clients got hit with a double whammy. First, they needed money to cover sudden losses. Second, the extra margin meant that they had to fund that as well. Brokers were being threatened by the exchanges, which shut down terminals. So, the brokers panicked, and sold positions across the board´┐Ża disaster for many.

HDFC [Get Quote] Securities under the head of Margins says: "The client agrees (that)... the stock broker shall be entitled to, at any time, without any notice to the client, appropriate and/or sell and/or instruct the designated bank to sell and/or transfer all or any securities or money in the client's account and/or any associated account and/or the proceeds thereof".

4. Even if you lose your money because of the broker's negligence, the broker is not liable to pay you any damages.

HDFC Securities' agreement says under the head Reimbursements "the client agrees that under no circumstances, including negligence, shall the stock broker or anyone involved in creating, producing, delivering or managing the stock broker service or system be liable for any direct, indirect, incidental, special or consequential damages including, but not limited to lost profits, trading losses..."

5. If your broker is unable to cope with the number of orders coming his way and cannot execute your order when you make it, well that's your problem too. Want priority for an important order that could make or break your portfolio? Well, that's just too bad.

Indiabulls, under the heading Brokerage and other charges specifies: "...the member may in its absolute discretion determine the priority in the execution of its clients' orders, having a due regard to the sequence in which such orders were received and fairness to all clients involved..."

6. So your broker's sales guy showed you a bright, sunny future if you invest in a certain product, and you put your money in it. Turns out that the sales guy had misrepresented the product. What can you do? Again, quietly bear the loss.


Sue the broker under Consumer Protection Act
E-brokers can be sued under Section 79 of the IT Act
Trade with your own money, if you do leverage on margin, make sure you have enough funds to cover
Do not invest based on tips from your broker
If you face a technical problem, email your broker first, then call
Write to the stock exchanges and Sebi to complain about the broker

Indiabulls' Limitation of liability clause says: "The member shall not be liable for any inaccuracy, error, false statement, misrepresentation or fraud committed by any sales or other associated/third parties engaged by the member to promote the services offered by it."

7. You place an order with the broker and expect that it will be executed. The broker's computer system suffers a virus attack and they are unable to transact for you. The big upside you saw in selling that stock at its 52-week high is lost because of this. Isn't the broker responsible? No.

ICICI Securities (page nine) mentions: "The client agrees that the stockbroker shall not be liable or responsible for non-execution of the orders of the client due to any link/system failure at the client/stock broker/exchange end."

Anandam Banerjee almost lost Rs 34,000 in July 2007, thanks to Kotak Securities' technical problem. On 23 July, around noon, he placed an order for short selling 20,000 JP Hydro shares on margin, while he had 400 shares of JP Hydro in his demat account. Just as he placed the order online, Kotak's system stalled, for about 45 minutes. Banerjee's order status showed as 'Open Order' and trade status as 'No Trades'. He tried to cancel the order online, and also contacted Kotak Securities' customer care. "I called 30-40 times. Each time I was put on hold. I also wrote an urgent mail to them," he says. Later in the day, his order status said 'Cancelled' and trade status 'No Trades'.

"Next day, I got a call from them saying I had a short position of 19,600 JP Hydro shares and I needed to give delivery of these shares. I was shocked," says Banerjee. After much arguing, on 29 August, Kotak reimbursed most of Banerjee's losses. "I was lucky, not all brokers would have reimbursed clients' losses," he says. Despite several attempts, Kotak Securities was not forthcoming with an explanation.

8. The broker can also refuse to follow any instruction you give and not even offer you a reason for this. If you lose money because of this, again, it's your problem.

Indiabulls (Execution of orders; confirmation) specifies: "Without prejudice to any of the member's rights, the member shall be entitled at any time (without liability on the member's part and without assigning any reason thereof) to refuse to act on any particular instructions (including any instructions countermanding other instructions) from the client."

Though member-client agreements vary from broker to broker, most of these clauses are present in all the forms in one variant or the other. Unfortunately, these are standard forms and the broker is not likely to change any of these clauses for you.

Legal support

Is there any legal recourse at all? Pavan Duggal, advocate, Supreme Court, says, "Normally the broker contracts are one-sided in favour of the broker. However, the consumer can sue the broker under the Consumer Protection Act, 1986, for deficiency of service, in case the broker faults."

In addition, since the trading is in the electronic form, the consumer can sue the broker under Section 79 of the IT Act, 2000, for its role as a network service provider. Under this, they are liable to pay compensation up to Rs 1 crore.

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