Stockbrokers Get a Break as Insolvency Ruling Provides Much-Needed Relief

A recent ruling from an insolvency court has brought relief to stockbrokers by confirming that they are not covered by the Insolvency and Bankruptcy Code (IBC). This decision comes after a petition against Karvy Stock Broking Ltd was dismissed. However, bankruptcy lawyers warn that this doesn’t mean brokers are free from accountability, as creditors can still approach the market regulator.

On September 10, the Hyderabad bench of the National Company Law Tribunal (NCLT) rejected a claim from Kapston Facilities Management Ltd, which was seeking to recover a debt of ₹1.07 crore from Karvy. The tribunal stated that the corporate insolvency resolution process (CIRP) could not be started against Karvy because stockbrokers are classified as financial service providers (FSPs) and not as corporate entities, thus keeping them out of the IBC.

This ruling reaffirms a previous decision from the National Company Law Appellate Tribunal (NCLAT) that stockbrokers are FSPs and cannot be taken to insolvency court. According to Manoj Kumar, a partner at Corporate Professionals, this exclusion is important because stockbrokers manage customers’ money directly, and allowing them to go into insolvency could create significant problems for many individuals.

Jasmine Damkewala, a senior partner at Circle of Counsels, noted that the NCLT’s decision has provided essential relief to stockbrokers and aligns with a previous ruling. Creditors still have options for seeking recovery, such as going to the Securities and Exchange Board of India (SEBI), which has investor protection funds, filing cases in civil court, or pursuing arbitration.

Amir Bavani, founder of AB Legal, mentioned that SEBI’s investor protection fund can help compensate investors if trading members fail to meet their obligations.

Need for Government Clarity

Some insolvency experts are calling for clearer guidelines under the IBC. Rony Oommen John, an advocate at the Supreme Court, pointed out that while the government introduced FSP rules in 2019 allowing for insolvency procedures against FSPs, stockbrokers are not specifically recognized as FSPs under the IBC unless officially notified.

Gaurav Gupte, a partner at Cyril Amarchand Mangaldas, suggested that the government might need to either notify stockbrokers as FSPs for insolvency proceedings or create a new law, similar to the proposed Financial Resolution and Deposit Insurance Bill from 2016.

Before this recent ruling, stockbrokers had faced insolvency actions. For example, the NCLT had started CIRP proceedings against Pacific Shares & Stock Broker Ltd in July 2021, leading to liquidation in April 2022. Other firms, like Manoj Stocks Pvt Ltd and IV Share and Stock Brokers Ltd, also went through liquidation processes. These cases show the confusion that stockbroking companies faced under the IBC until the NCLAT clarified their status as FSPs, according to Mukesh Chand, senior counsel at Economic Laws Practice.