Mumbai : The Securities and Exchange Board of India (SEBI) on Tuesday night imposed a fine of 3 crore more on BSE 2 crore on NSE for alleged laxity in detection of misappropriation of client securities by Karvy Stock Broking Ltd.
The case pertains to illegally transferring securities of Rs. 2300 crores of more than 95,000 clients in just one demat account named Karvy Stock Broking Limited (BSE). Further, the brokerage firm had pledged these securities to itself and its group entities to raise Rs 851.43 crore from 8 banks/Non-Banking Financial Services Firms (NBFCs) unauthorizedly.
SEBI in two separate orders found the exchanges lax in detecting misuse of clients’ securities by the brokerage firm. In its order, SEBI said that the exchanges followed a ‘contingent approach’ while inspecting the broker in the past years.
The orders also explain how Karvy exploited gaps in information resolution by Market Infrastructure Institutions (MIIs).
MII includes exchanges and depositories.
The demat account used by Karvy was treated as BSE margin account to effect mass transfer of securities of investors.
SEBI, in its 64 page order against BSE, said, “BSE has not examined this account at all, leading to gap in supervision, which has allowed KSBL (Karvy) to pledge client securities through this account.” Gave permission.”
The SEBI order said, “It evaded investigation by BSE in 2 cases – firstly, failure to verify the naming of the account by BSE and secondly, off-market transfer by NSDL relating to this account shared with BSE. Failure to check alert on
This particular account escaped the scrutiny of NSE as it was BSE tagged account.
“NSE was of the view that in view of the manner in which the responsibilities were exercised, the responsibility for conducting inspection and examination was not on it,” the SEBI order against NSE was quoted as saying by the exchange.
As per SEBI order, BSE had conducted complete inspection of Karvy for the financial year 2016-17.
In the same year, BSE had received an email from the regulator highlighting the complaint against Karvy for violating net worth norms. Karvy was investing in group companies through both debt and equity. Karvy has huge debt of Rs 1000 crores on very low equity basis. This debt should have ideally turned Karvy’s net worth into negative.
In the same financial year, NSE had secured substantial funding to Karvy (Corporate Guarantee Amount 1,917 crore) to a group company which is not involved in any securities business, resulting in Rs. has a negative net worth 79.75 crores of KSBL. It was also observed by NSE that the value of Corporate Guarantee issued was more than its total balance sheet value: 1338.21 crore as on 31-03-2016
SEBI said in the order that the BSE did not flag negative net worth concerns during the full inspection.
“It is necessary to appreciate that the noticei (BSE) plays the role of a frontline regulator and the obligation to inspect the brokers cannot be checklist based, especially when a red flag was highlighted by SEBI and there is no need to implement the notice. Was aware of penalty on KSBL (Karvy) by NSE. However, from the inspection report of 2016-17 and submission of notice, I found that the inspection was done in a regular and mechanical manner, taking into account the reference of SEBI and the findings of NSE without placing,” said BSE against the order of SEBI.
Against NSE, SEBI stated that the exchange needs to take proactive action as there were serious findings relating to substantial amount of KSBL funding to the group company by NSE.
“KSBL (Karvy) was able to successfully evade detection of the Customer Protection Pledge as it had wrongly informed NSE that the account was a margin account of another exchange and was not related to NSE transactions. Accepting the claim of KSBL at face value. The fact that the account was a BSE margin account reflects the lack of due diligence on the part of NSE in ensuring necessary compliance,” SEBI said in an 89-page order against NSE.
SEBI said, “The Standard of Due Diligence for NOTICE (NSE) has to be viewed in the context of its function as a first level regulator and will be heavily on it to provide a safe and reliable infrastructure for trading in securities.” The responsibility has been cast.”