India’s market regulator on Tuesday fined BSE 3 crore and the National Stock Exchange (NSE) 2 crore rupees for “laxity” in detecting misconduct by Karvy Stock Broking (KSBL).
The Hyderabad-based brokerage misused securities worth Rs 2,300 crore belonging to more than 95,000 clients by pledging them without permission, the Securities and Exchange Board of India (Sebi) said. The company and its group entities used funds to raise Rs 851 crore from eight banks.
“Undoubtedly, it was KSBL which misused the securities of the customers (sic) by pledging them without authorization and was therefore liable for the loss caused by the pledging of securities which it did not own, including the loss for the investors as well as the loss to banks and NBFCs that lent funds to KSBL against securities that do not belong to KSBL,” Sebi said.
“…it cannot be ignored that KSBL being a member of the BSE (& NSE), was under their regulatory oversight…there was laxity on the part of Noticee (BSE & NSE), which delayed detection of misconduct by KSBL and Avise should be held liable for the same,” Sebi said in two separate orders against the nation’s major exchanges.
“The extent of misuse by KSBL indicates the loss to investors that can potentially be caused when improper behavior is not detected in a timely manner,” Sebi said.
Sebi had reviewed the details of the inspection and action taken by NSE and BSE against KSBL conducted between 2016 and 2019. He further asked the exchanges to provide the procedure they followed to ensure reconciliation of client securities.
Sebi’s investigation revealed shortcomings on the part of both exchanges.
In 2019, Sebi had passed an interim ex parte order against KSBL when the issue of unauthorized pledging came to light. Efforts by Sebi, custodians and exchanges have helped KSBL clients collect their dues.
In December 2019, depository company NSDL said securities had been returned to 82,559 customers from the KSBL Demat account. In November 2020, NSE said funds and securities worth Rs 2,300 crore belonging to around 235,000 KSBL investors had been settled.
After the KSBL investigation, Sebi changed the standards for share pledging to prevent misuse by the brokerage. The regulator removed the concept of power of attorney which previously allowed brokers to access client securities.