The Securities and Exchange Board of India (SEBI) has developed an in-house online system to prevent misuse of clients’ securities by brokers — a move that follows the Karvy episode where it was found that Karvy used clients’ securities to raise funds and diverted it. According to the markets regulator, it would be able to prepare client level securities holding register of the brokers.
“Sebi collects the details of the clients’ securities submitted in weekly report filed by brokers with the exchanges and updates the same with trades conducted in the accounts of said clients using the data available with Sebi in DWBIS (Data Warehouse & Business Intelligence System) as well as data provided by the exchanges, clearing corporations and depositories pertaining to auction trades, corporate actions, SLBM transfers and off market trades,” Sebi said.
On November 22, Sebi banned Karvy Stock Broking (KSBL) from taking fresh business for allegedly misappropriating money and securities belonging to its investors in order to fund its real estate arm, Karvy Realty. 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 regulator said.
“Sebi has developed the in-house capabilities to online track the movement of client securities collected by broker as collateral and raise alerts with the exchanges if diversion of clients’ securities is noticed. These reports are being generated by Sebi on a weekly basis and three such mismatch reports have already been forwarded to the exchanges for reconciliation with members,” it said. This system is likely to timely detect the misuse of clients’ securities collected by brokers as collateral or received in pay-out of securities, Sebi added.
“In the recent past years, it has been observed that some brokers have misused clients’ securities received as collateral to meet their own settlement obligation or obligations of other clients. Some brokers have also misused clients’ securities by pledging them with the banks and NBFCs to raise funds for their own use,” Sebi said.
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