SEBI penalises BSE, NSE for laxity in detecting misuse of clients' funds by Karvy Stock Broking

Capital markets regulator SEBI has penalised stock exchanges — BSE and NSE — for "laxity" on their part in detecting misuse of clients’ securities worth Rs 2,300 crore by Karvy Stock Broking Ltd (KSBL).

In two separate orders, the Securities and Exchange Board of India (SEBI) has imposed a fine of Rs 3 crore on BSE and Rs 2 crore on NSE.

The matter relates to KSBL misutilising client securities worth Rs 2,300 crore, belonging to more than 95,000 clients, by pledging them from just one demat account.

The funds raised against the pledge were used by KSBL for itself and its group entities.

KSBL and its group entities utilised this money for raising Rs 851.43 crore from 8 banks/NBFCs.

"Without doubt, it was KSBL which misused clients’ securities by unauthorisedly pledging them, and was thus responsible for loss caused by pledging securities which it did not own, including loss to investors as well as loss to banks and NBFCs who loaned funds to KSBL against securities which did not belong to KSBL,” as per the orders passed on Tuesday.

SEBI noted that KSBL being member of BSE and NSE was under regulatory supervision of the exchanges.

There was "laxity" on the part of exchanges, which resulted in delayed detection of the misconduct by KSBL and the bourses need to be held accountable for the same.

Accordingly, the regulator has levied fines on the exchanges for the delay in detection of misuse of client securities by KSBL.

The orders come after SEBI along with NSE and BSE conducted a joint inspection of KSBL from June 2019.

Subsequently, a forensic auditor was appointed by NSE and preliminary report was forwarded by it to SEBI in November 2019, based on which the regulator passed an interim order and then confirmatory order on the non-compliances observed with respect to the pledging/misuse of client securities by KSBL.

In its 2019 order, SEBI had directed depositories to allow transfer of securities from the one demat account to respective beneficial owners who had paid in full against the securities under the supervision of NSE.

Following the SEBI order, securities were returned to clients.

In December 2019, National Securities Depository Limited had announced that securities were returned to 82,559 clients from the KSBL demat account.

Further, NSE, in November 2020, had said that funds and securities worth Rs 2,300 crore belonging to KSBL investors were settled.