The Securities and Exchange Board of India (SEBI) has fined the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) for supposed “laxity” in detecting the misuse of client securities by Karvy Stock Broking Ltd.
The markets regulator imposed a fine of Rs 3 crore on BSE and Rs 2 crore on NSE on Tuesday night. The matter pertains to the Hyderabad-based brokerage unauthorisedly pledging securities worth Rs 2,300 crore of over Rs 95,000 clients by transferring them in just one Demat account, said the SEBI.
Karvy and its group entities utilised funds to raise Rs 851 crore from eight banks.
In two separate orders against the BSE and NSE, the markets regulator said the exchanges were lax in early detection of the misuse of clients’ securities by the brokerage firm. SEBI added that the exchanges had a ‘casual approach’ while scrutinising Karvy in the previous years.
“Without doubt, it was KSBL which misused clients (sic) securities by unauthorisedly pledging them and was thus responsible for loss caused by pledging securities which it did not own, including loss to investors as well as loss to banks and NBFCs who loaned funds to KSBL against securities which did not belong to KSBL,” said the regulator.
“…it cannot be ignored that KSBL being member of BSE (& NSE), was under their regulatory supervision…there was laxity on the part of Noticee (BSE & NSE), which resulted in delayed detection of the misconduct by KSBL and the Noticee needs to be held accountable for the same,” it added.
“The scale of misuse by KSBL points to the loss to investors which can potentially be caused when irregular conduct is not detected in a timely manner,” noted SEBI.
The markets regulator had checked the details of the inspection as well as action taken by the exchanges against Karvy conducted between 2016 and 2019. SEBI further asked the BSE and NSE to furnish the procedure they followed to ascertain the reconciliation of clients’ securities.
The markets regulator identified lapses on the part of both exchanges. The SEBI had in 2019 passed an ex-parte ad-interim order against Karvy when the issue came to light. Following the efforts by SEBI, exchanges and depositories, the brokerage firm’s clients recovered their dues.
Depository firm NSDL said in December 2019 that securities were returned to 82,559 clients from Karvy’s Demat account. In November 2020, NSE had stated that funds, as well as securities worth Rs 2,300 crore belonging to around 2,35,000 investors of Karvy, were settled.
Following the brokerage firm’s probe, SEBI changed rules around pledging of shares to thwart misuse by Karvy. The markets regulator removed the concept of power of attorney that earlier authorised brokerages get access to client securities.
