SEBI Probing Exchanges, 12 Brokerages To Find Out How Karvy’s Illegal Pledging Of Clients’ Shares Went Undetected

The Securities and Exchange Board of India (SEBI) has widened its investigation into the Karvy Stock Broking Ltd fiasco to find out how stock exchanges failed to detect the illegal pledging of clients' shares by Karvy, despite periodically auditing broking firms.

The SEBI is also investigating 12 stock broking firms and whether more stock broking firms indulge in similar practices.

While the allegedly illegal transactions took place between 2016 and 2019, they were detected only much later, between January 2019 and August 2019, after a limited purpose audit by the National Stock Exchange (NSE).

The NSE limited purpose audit revealed that Karvy had misused client securities by pledging them with various lenders without authorization. The total value of these transactions was estimated to be Rs 2,000 crore, making it one of the largest defaults by a stock broker in India.

Based on preliminary findings, on November 22, 2019, SEBI banned Karvy from signing up new clients or transacting on their behalf and stated that some funds have also been transferred to Karvy group firms.

It may be recalled that in December 2018, the SEBI had asked brokers to standardize their books and records, making it easier for exchanges to inspect and compare broker data.

In January 2019, it directed brokers to report their security balance weekly. After these changes, exchanges began a reconciliation process of matching exchange records with depository records.

Depositories were then directed by the SEBI to share pledge details with the brokers.

In June 2019, brokers were barred from using client securities to raise funds and asked to wind down existing pledges from October 1, 2019.