MUMBAI : 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.
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.
“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.
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.
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.
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.
The markets regulator has estimated the misuse of client securities by the broker at ₹2,800 crore.
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.
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.