Karvy aftermath: SEBI plans to revamp structure to check skulduggery by brokers

After the news of Karvy Stock Broking ban sent market traders into a tizzy, regulator Securities and Exchange Board of India (SEBI) is planning to put in place a new structure that will bar brokers from offering clearing and settlement services.

SEBI had first discussed a revised structure in 2017 but was not prepared for implementation.

Under the revised structure, the client money will continue to be kept with depositaries such as NSDL and CDSL or custodian and can be transferred to a broker only under the direction of the clearing corporation.

For instance, if there is a loss in a client's account, the depositories can transfer the money to brokers only after permission from the clearing corporation. The client will be kept in the loop throughout the whole process.

However, if a client has kept a fixed deposit as security, then the existing system will be followed to transfer money.

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"We will make this structure like a banking system where client money doesn’t get misused," a SEBI source told Moneycontrol.

This trade will be similar to the practice followed in foreign institutional investors trade, where client money and security are kept at different places.

In India, there are three private custodians apart from banks - Edelweiss, Orbis and Stock Holding. SEBI may form mini custodian or retail custodian for handling retail money.

Moneycontrol had earlier reported about SEBI planning to implement stricter norms to safeguard client money.

"SEBI is getting many complaints of misuse of client money by brokers. Recently, in the IL&FS case, a Delhi-based brokerage house used client money to clear dues at the time of losses," another source in an exchange told Moneycontrol.

Another senior SEBI official said: "This would be one of the greatest reforms in the capital market. It will increase the confidence of investors who use the services of brokers."

In the past, many brokers such as Unicorn, Kasa Finvest and Amrapali  allegedly misused money of clients. In such cases, the investor protection fund is the last resort for the investor to retrieve money. However, the fund has a cap of Rs 15 lakh.