SEBI introduces system to detect misuse of client securities by stockbrokers

Under the new system, an online register will record brokers’ holdings of client securities.
SEBI introduces system to detect misuse of client securities by stockbrokers
SEBI introduces system to detect misuse of client securities by stockbrokers
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The Karvy Stock Broking case has prompted the Securities and Exchanges Board of India (SEBI),  to initiate steps to curb the practice of brokers misusing their clients’ securities. The regulator has put in place a new monitoring system with alerts for this. An online register is going to be created which will record the details of clients’ securities lying with the brokers. In addition, if the clients’ securities are collected by the exchanges, depositories and clearing corporations, these details will also be captured in the register. And this will encompass all types of trade whether auction trade or off-market trades.

The mechanism will then be able to do a match of the securities being tendered by the broker the next day with the actual securities being held in the demat account. Here, if any mismatch occurs, this will get flagged. A corresponding alert will go to the exchange. This way, the exchanges can make the brokers explain the mismatch and hopefully bring such wrong practices to a halt.

It was in the case of Karvy Stock Broking Ltd, that SEBI took strong action following the detection of the broking firm had raised funds using clients’ securities without the knowledge and consent of the clients. It went a step further and diverted part of those funds to its sister companies, including Karvy Realty Ltd. SEBI barred Karvy from signing up new clients and using power of attorney. It was estimated that the total worth of securities or funds raised through such actions amounted to around Rs 2,800 crore.

On December 1, 2029, the National Stock Exchange of India Ltd (NSE), BSE Ltd, Multi Commodity Exchange (MCX) and MSEI suspended the trading licence of Karvy Broking.     

With the new system in place SEBI has acquired the capacity to “track online the movement of client securities collected by the broker as collateral and raise alerts with exchanges if diversion of clients’ securities is noticed”, claims the regulator.

Kassa Finvest, Amrapali Aadya Trading & Investment Ltd and Ficus Investments are some of the other names being mentioned where similar frauds have been detected and action initiated by SEBI.

This is a kind of a cat & mouse game where the regulators try and put in checks and balances in the system but a few unscrupulous brokers within the stockbroking community find ingenious ways of beating the system. Then SEBI and the exchanges have to again change the rules and this goes on.

Ultimately it is the investor who suffers in this and it is their interest that SEBI wants to protect.

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