Post Karvy, Sebi appears to impose limits.

Post Karvy, Sebi appears to impose limits.

Mumbai: The Securities and Exchange Board of India (Sebi) is analyzing if brokers should be barred from providing settlement and clearing services, after the regulator discovered Karvy Stock Broking had sold client stocks vowed to it for loans, 2 individuals directly alert to the issue said.

“we’ve been getting a lot of complaints regarding defaults by agents in payouts to clients. We’re working on improving systems and processes concerning handling of customer money by brokers,” that a Sebi official, among the two people mentioned previously, said on condition of anonymity. Among those policy changes that Sebi is contemplating is barring brokers from settling and clearing trades, the individual said.

“There’s been an increase in agent defaults in the previous one year and it can render the markets susceptible to systemic risk. In light of the regulator is considering that custody of customer security, reimbursement and clearing of transactions is managed by well capitalized bank custodians,” the second of those two individuals cited above said, requesting anonymity.

Sebi’s relook in the policy comes in the wake of its 22 November order prohibiting Karvy from executing transactions and taking on new clients. Karvy is alleged to have misused customer securities. At an estimated crore, it is one of the biggest defaults by a stock agent in India.

Transferring client securities to prop accounts or pool account in any method needs to be prevented.

It’s important for the operator to set up a foolproof system that will send an alert to real time basis if a broker were to indulge in such shenanigans, said an analyst who didn’t wish to be named. “It’s the second case in the last few years when such a crime has gone undetected till its complete ramifications have prevailed. If you recollect, one of the brokers had sold off mutual funds units of a client totalling a couple of hundred crores lying in the depository accounts of the broker,” the person said.

Karvy Stock Broking manages accounts of 244,000 customers, based on National Stock Exchange of India (NSE) data. The issue came to light after investors complained that Karvy was delaying their payouts. An inspection conducted by NSE pointed to discrepancies in trading between 1 April 2016 and October 2019.

NSE has hired EY India Ltd to conduct a forensic analysis of the trades of Karvy to determine whether there wasn’t any diversion of funds, the next person cited above said.

Sebi’s interim instructions preventing Karvy from trading, taking on new clients and settling trades on clients’ behalf bars Karvy’s operations . Karvy group services over 70 million investors in various capacities, and offers investment solutions to over 600 homes.

“The Sebi directive against Karvy bars the brokerage firm from settling and executing any transactions on clients’ behalf. Even the transactions that were executed on Friday cannot be settled by Karvy and depositories would have to track delivery for settlement of these transactions,” said Anubhav Ghosh, spouse, Law Point. Brokerage firms’ business model for institutional and large traders depends on their ability to square off their positions. But considering the limitations on Karvy of Sebi, it won’t be able to achieve that. This spells trouble for banks that have a combined exposure of 1,415 crore to Karvy Stock Broking, according to files. Taking into consideration the business’s operations have come to a standstill, the restoration of bank loans appears difficult.