Market regulator Securities and Exchange Board of India’s (Sebi) crackdown against stockbrokers misusing client funds and securities in the wake of the Karvy saga has led to a significant decline in compensation claims filed by defrauded investors. According to the latest data, the National Stock Exchange(NSE) provided compensation worth Rs 52 crore to investors who were defrauded by brokers in FY24. This is a steep fall from Rs 129 crore in FY23, Rs 535 crore in FY22 and Rs 552 crore in FY21, the NSE data showed.
The trend is also evident in the number of compensation applications received during the year. According to data, the NSE received 153 such claims in FY24 compared to 757 claims in FY23, 3,009 in FY22 and 68,111 in FY21, the data showed. Karvy Stock Broking was declared a defaulter by the NSE on November 23, 2020.
The development assumes significance as Madhabi Puri Buch, chairperson of Sebi, said last year that the regulator would not allow another Karvy type default.
According to the Sebi rules, any investor who has lost money due to a broker default or fraud can claim money lost up to Rs 25 lakh. These claims are paid by the NSE through a special fund named Investor Protection Fund Trust (IPFT). As of April 30, the fund had a corpus of Rs 2,022 crore, data showed.
“There will not be another Karvy issue in our capital markets... If another Karvy-like instance happens, it will be on our dead bodies...,” Buch had told reporters in March 2023, in a post board meeting press conference.
“The Regulator has done a commendable job of safeguarding investors after the Karvy and Anugrah defaults. SEBI's actions are well-planned and informed by the market and stock exchange inputs, not a rash response,” said Abhiraj Arora, partner, Saraf and Partners.
Arora added that the Karvy and Anugrah defaults happened because investors were lured by the interest that brokers offered if they left their securities or unused funds with the brokers. “The reforms have enhanced the market's confidence, but they require investors to cooperate and avoid greed,” he added.
In the last three years, Sebi has overhauled the entire regulatory framework of brokers. Sebi tightened the rules around Power of Attorney (POA), which is used to give brokers the power to operate client accounts. Brokers are now required to mandatorily disclose client-wise collateral on a daily basis. Brokers are now also required to upstream all client funds to clearing corporations, where they are held until transactions.
“All these measures by SEBI have increased transparency in handling of client securities by the intermediaries and plugged the regulatory loopholes available to brokers to gamble with the securities and funds of their clients,” said Sidharth S. Kumar, Senior Associate, BTG Advaya. “However, SEBI can further improve the system by including elements of blockchain technology to track pledge/margin transactions pertinent to a particular security.”
Between 2018 and 2020, thousands of investors lost their shares or money on account of a spate of broker scams. Karvy was the most prominent broker, with client funds and securities worth Rs 2,300 crore siphoned off. Till date, 61,604 investors have filed compensation claims with the NSE in the Karvy matter, data showed.
Apart from this, 17,134 claims were received because of the BMA Wealth Creators saga, which happened during the same time. Fairwealth Securities and Anugrah Stock Broking were also significant defaulters with each having about 5,000 clients, data showed.
“Ever since its ban on Karvy, SEBI has made continuous efforts to curb the misuse of clients’ funds by brokers,” said Kinjal Champaneria, partner, Solomon & Co. “We are of the view that the requirement of daily reporting by brokers may have acted as a deterrent and may have resulted in reduction in the number of claims made by investors substantially.
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