Let’s start with an assurance to the question ‘What happens if a stockbroker goes bust in India?’ Your capital or funds are safe in a practical manner of speaking. It is not as if the stockbroker can take your money.
For instance, when Harshad Mehta was found guilty, his Grow More Research and Asset Management were banned by the Securities and Exchange Board of India (SEBI). However, nothing happened to the funds that investors had at the company.
The first thing to keep in mind is that stockbrokers are merely intermediaries. They do not have direct access to your funds, and they can just withdraw your money and run away. However, you might give them detailed instructions on using the money you have with them.
Here is how stocks, shares, and mutual funds are safe from direct access to your broker:
Your funds are in a Demat (short for ‘dematerialized’) account, which allows you to hold stocks and other securities in digital form. These demat accounts actually reside at depositories, both the SEBI-approved: the Central Depository Services (India) Limited (CDSL) and the National Securities Depository Limited (NSDL), which was created by the Indian Government’s Ministry of Finance (MoF).
At no point are your stocks and shares with the brokerage or the individual broker. They function just as a platform, like the intermediary mentioned above. All they can do is trade as per your instructions using the funds in your trading account.
Your mutual fund investments reside at asset management companies (AMCs). Therefore, if, theoretically, Groww shuts down, your mutual funds are safe at the AMC.
First and foremost, your shares or any other securities are safe in electronic form at the NSDL or CDSL or the respective AMC.
You must focus on your trading account, i.e., the account that contains the money your broker uses to buy and sell on your behalf. If any such unfortunate event were to occur, you need to apply to the Investor Protection Fund (IPF), set up by SEBI, to provide compensation. You need to file a claim for compensation within three years per SEBI rules to become eligible for such payment.