Capital markets regulator Securities and Exchange Board of India (SEBI) has penalized the stock exchanges – Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) – for “laxity” on their part in detecting the misuse of client securities worth Rs 2,300 crore by Karvy Stock Broking Ltd (KSBL).
In two separate orders, SEBI imposed a fine of Rs 3 crore on ESB and Rs 2 crore on NSE.
The case concerns KSBL’s misuse of client securities worth Rs 2,300 crore, belonging to more than 95,000 clients, by pledging them from a single demat account. The funds raised against the pledge were used by KSBL for itself and its group entities.
KSBL and its group entities used the money to raise Rs 851.43 crore from eight banks and non-bank financial companies (NBFCs).
“Undoubtedly, it was KSBL that misused clients’ securities by pledging them without permission, and was therefore liable for losses caused by pledging securities it did not own, including losses to investors as well only losses for banks and NBFCs that lent funds to KSBL against securities that do not belong to KSBL,” according to the orders passed on Tuesday.
SEBI noted that KSBL being a member of BSE and NSE was under the regulatory oversight of exchanges. There was “laxity” on the part of the exchanges which delayed KSBL’s detection of fault and the exchanges must be held accountable.
As a result, the regulator imposed fines on the exchanges for the delay in detecting the misuse of client securities by KSBL.
The orders come after SEBI, NSE and BSE carried out a joint inspection of KSBL from June 2019.
Subsequently, a judicial auditor was appointed by NSE and a preliminary report was sent by him to SEBI in November 2019, on the basis of which the regulator issued an interim order and then a confirmatory order on the non-compliances observed. with respect to the pledging/misuse of customers. titles by KSBL.
In its 2019 order, SEBI had ordered the custodians to authorize the transfer of securities from the one demat account to the respective beneficial owners who had paid for the securities in full under the supervision of NSE. Following the order of the market regulator, the securities were returned to the customers.
In December 2019, National Securities Depository Limited announced that securities had been returned to 82,559 customers from the KSBL demat account. Additionally, NSE in November 2020 said funds and securities worth Rs 2,300 crore belonging to KSBL investors had been settled.