New Delhi: Capital markets regulator Sebi has penalized the stock exchanges, BSE and 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, the Securities and Exchange Board of India (Sebi) imposed a fine of Rs 3 crore on BSE 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 this money to raise Rs 851.43 crore from 8 banks/NBFC.
“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.
The 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 exchanges for the delay in detecting 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 forensic auditor was appointed by NSE and a preliminary report was transmitted by him to Sebi in November 2019, on the basis of which the regulator adopted an interim report. order then confirmatory order on the non-compliance noted in terms of pledging/abuse of client securities 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 Sebi’s order, 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.