Post Karvy ban, broader issue for Sebi is to bring structural changes: Experts

The regulator’s investigation found that the company allegedly pledged securities of its clients with private banks and NBFCs, and used money to the tune of Rs 1,000 crore for purposes including funding its own real estate subsidiary Karvy Realty.

It was observed by Sebi that Karvy was allegedly using one client’s securities to meet the obligation of another. Further, clients’ securities were also allegedly used to meet the obligations of the broker on proprietary account. These are not permitted under Sebi regulations.

While the market regulator has already ordered a forensic audit into the misuse of clients’ securities by Karvy, there is a need to further tighten norms to prevent such misuse, sources said.

Normally, securities move from client account to trading member pool to clearing market pool and then to the clearing corporation.

“There needs to be a change in the current structure so that brokers don’t have the scope of misuse,” said a source, who did not wish to be named.

The market regulator may also expand the scope of its investigation beyond Karvy, since it has been learnt that pledging of clients’ securities for other purposes is practiced rampantly in the industry.

Earlier this year, Sebi had directed brokers that securities bought in the market through the stock exchange on behalf of a client should be credited to the demat account of the respective client within one working day of the payout.

It had directed that a client’s securities lying with the trading member/clearing member cannot be pledged to banks or non-banking finance companies (NBFCs) for raising funds, even with authorisation by client since this was akin to a fund-based activity by the trading member or clearing member, which is not permitted under the regulations.