The case of Karvy Stock Broking Ltd is assuming larger proportions with the Securities and Exchange Board of India (SEBI) now stepping and asking some key questions. According to a report in Mint, regulator wants to know how the stock exchanges failed to spot the anomaly earlier and has asked for the investigation to be expanded to include this aspect as well. More stock broking firms are also set to be included in the ambit of the enquiry.
SEBI’s wants to know how the audit teams of the stock exchanges, which should have spotted these alleged frauds failed to do so. The basic charge is Karvy used the shares of its clients to raise funds and the extent of this fraud could be around Rs 2,000 crore. Some portion of these funds have then been transferred to Karvy’s group firms as well, as per allegations.
Misuse of clients’ resources by brokers is something that should be detected at the exchange level, according to SEBI. The annual inspection of brokerages carried out by the exchanges is meant for this purpose.
Investigation has shown that these transactions by Karvy were carried out starting from the year 2016 but came to light only in the middle of this year. This has got SEBI worried that the checks and balances in the system are inadequate to deal with such situations.
SEBI has placed restrictions on Karvy preventing it from signing up new clients. Any transaction the stock broking firm may be entering into will be scrutinised with a microscope before being allowed.
SEBI has been busy trying to bring more sanity in the way the brokerages are run. One order it issued was for all brokers to standardize their data for easier comparison. This was in December 2018. This was followed the very next month, January this year with the fiat to the brokers to declare their security balance weekly. In the next step, a process of reconciliation was undertaken, to check if the records in the exchange match with those at the depository.
The latest set of instructions have gone out to the auditors of brokers to pay attention to the pledges, collaterals, disclosures with respect to related-party transactions, expense sharing agreements, capital contributions and withdrawals, inter-group exposures so that any such misuse of clients’ shares as it happened in the case of Kary can be detected on time and reported. There should be a review of the software/compliance tools to see if improvements can be made to flag any violations.
On its part, Karvy has informed that it is in the process of returning the moneys to the clients.