Stockbrokers breathe easy as bankruptcy cloud lifts, but creditors have other remedies
An insolvency court ruling keeping stockbrokers out of the purview of the Insolvency and Bankruptcy Code, while dismissing a petition against Karvy Stock Broking Ltd, has brought relief to the brokerage industry. Yet, according to bankruptcy lawyers, that does not mean brokers will be shielded from accountability as creditors can approach the market regulator.
The Hyderabad bench of the National Company Law Tribunal (NCLT) on 10 September rejected an application filed against Karvy by Kapston Facilities Management Ltd, an operational creditor, to recover a debt of ₹1.07 crore.
The tribunal noted that the corporate insolvency resolution process (CIRP) could not be initiated against Karvy as stockbrokers fall under the category of financial service providers (FSPs) and are not classified as corporate persons, keeping them out of the reach of the IBC.
The ruling reiterates the view of the National Company Law Appellate Tribunal (NCLAT) from September last year, clarifying that stockbrokers are FSPs and cannot be taken to the insolvency court.
“The exclusion of financial service providers from the Insolvency and Bankruptcy Code is based on the fact that they directly manage customers’ money and deposits,” said Manoj Kumar, partner and head of M&A and investment banking at Corporate Professionals, Advisors and Advocates. “Allowing an FSP to enter insolvency could significantly stress many individuals.”
According to Jasmine Damkewala, senior partner at Circle of Counsels and advocate-on-record, Supreme Court of India, the NCLT’s decision in the Karvy case has provided much-needed relief to the entire body of stockbrokers, aligning with the earlier Nitin Pannalal Shah ruling
Creditors have avenues for relief, such as approaching the Securities and Exchange Board of India, which maintains investor protection funds; filing cases in civil court or pursuing civil remedies like arbitration, according to lawyers.
Advocate Amir Bavani, founder of AB Legal, said Sebi’s investor protection fund compensates investors when trading members fail to meet their obligations.
Need for clarity from government
Some insolvency experts argue that more clarity is needed under the IBC. “In 2019, the central government introduced the FSP Rules, which provide a mechanism to initiate insolvency against FSPs, including stockbrokers,” says Rony Oommen John, advocate-on-record, Supreme Court. “However, unless stockbrokers are specifically notified as FSPs under Section 227 of the IBC, they remain immune to insolvency proceedings.”
Gaurav Gupte, partner at law firm Cyril Amarchand Mangaldas, said the government may either notify financial service providers or categories of financial service providers for the purposes of the insolvency process under the IBC in consultation with the relevant regulator (Sebi in the case of stockbrokers), or introduce a separate enactment, as was proposed with the Financial Resolution and Deposit Insurance Bill, 2016.
Before the NCLT’s ruling in the recent Karvy case, the NCLAT had already clarified that stockbrokers cannot be subjected to insolvency. Prior to this clarification, stockbrokers faced insolvency proceedings. In the case of Pacific Shares & Stock Broker Ltd, the Mumbai bench of the NCLT initiated CIRP proceedings in July 2021 and ordered liquidation in April 2022. Similarly, Manoj Stocks Pvt Ltd and IV Share and Stock Brokers Ltd were also liquidated under voluntary frameworks.
These cases highlight the ambiguity that stockbroking companies faced under the IBC until the NCLAT ruling clarified their FSP status, said Mukesh Chand, senior counsel at Economic Laws Practice.
