SEBI rolls out system to detect misuse of client securities by brokers

Securities and Exchange Board of India (Sebi) on Thursday introduced a system to monitor and detect misuse of client securities by stock brokers, following the debacle at Karvy Stock Broking Ltd.

1. Under the new system, an online register will record brokers’ holdings of client securities, a Sebi press statement said. The system will club all the information of client securities collected by exchanges, depositories and clearing corporations pertaining to all types of trades such as auction trades, corporate actions, and off-market trades.
2. “The securities holding balance computed is matched with the actual clients’ securities holding in the demat account and submission made by the broker for the next day. Any mismatch in data is flagged as an alert for exchanges,” the statement said.
3. On 22 November, SEbI barred Karvy from acquiring new clients and using power of attorney, thereby preventing the company from trading on behalf of clients, after the broker allegedly used client money for other purposes and indulged in trades that were not authorized by them.
4. Karvy had, instead of pledging its own shares, pledged shares belonging to clients and utilised them to raise funds. Some of these funds were in turn transferred to its sister concerns such as Karvy Realty Ltd.
5. On 1 December, the National Stock Exchange of India Ltd (NSE), BSE Ltd, Multi Commodity Exchange (MCX) and MSEI suspended the trading licence of the brokerage firm.
6. The markets regulator has estimated the misuse of client securities by the broker at ₹2,800 crore.
7. Though the Depositories Act allows banks to accept client securities as pledged collateral, the client needs to transfer securities in the name of the broker and once the securities move out of the demat account of the client, it is not possible for him to keep track of use/misuse of those securities by the broker.
8. SEBI has developed in-house capabilities 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, the market regulator added.
9. In the past, due to multiple data collection points, some of the data on client securities and pledges created on them leaked or fell between the cracks.
10. “This is a way for the regulator to prevent any leakage of any sort which could harm investors’ interest,” said an exchange official.
11. Sebi reports have already highlighted three such mismatches and been forwarded to the exchanges for reconciliation with members.
12. Rising broker defaults over the last four years due to misuse of client securities has forced Sebi to change regulations on several occasions to prevent such occurrences.
13. In December 2018, the market watchdog introduced norms standardizing broker books and records to make inspection and comparison of data easier. Again in January 2019, the markets regulator directed brokers to report day-wise stock and fund balance with them. And in June 2019, Sebi barred brokers from raising funds by pledging clients’ shares, and ordered segregation and reporting of client stocks and funds.
14. Some other cases of alleged misuse include Kassa Finvest, Amrapali Aadya Trading & Investment Ltd, Ficus Investments.

Key Points:

• Under the new system, an online register will record brokers’ holdings of client securities, says the regulator
• The system will club details of client securities collected by exchanges, depositories and clearing corporations pertaining to all types of trades.

**SOURCE:  MINT