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Sebi sets up a system to detect misuse of client securities by brokers


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Securities and Exchange Board of India (Sebi) on Thursday set up a system which will help monitor and detect instances of misuse of client securities by stock brokers. This comes after Sebi passed an interim order against Karvy Stock Broking Ltd (Karvy) on alleged misuse of client securities.

On 22 November, Sebi barred Karvy from acquiring new clients and from using power of attorney, thereby preventing the company from trading on behalf of clients, after the broker allegedly transferred clients’ 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 used them to raise funds. Some of these funds were then transferred to its sister concerns such as Karvy Realty Ltd.

Though the Depositories Act provides for acceptance of client securities as collateral by way of pledge, the collateral of securities is accepted by way of title transfer of securities by brokers.

The client providing collateral in the form of securities needs to transfer his 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 a track of use/misuse of those securities by the broker.

The regulator said in a press statement on Thursday that this in-house online system prepares a client level securities holding register of the brokers. Sebi through this system will club together all the information of client securities collected by exchanges, depositories, clearing corporations pertaining to all types of trades such as auction trades, corporate actions, 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,” said Sebi in the press statement.

As such, Sebi has developed the in–house capabilities to online track the movement of client securities collected by broker as collateral and raise alerts with exchanges if diversion of clients’ securities is noticed, the market regulator added.

In the past due to multiple data collection points some of the data on client securities, pledges created on securities leaked or fell between the cracks.

“This is a way for the regulator to prevent any leakage of any sort which could harm the investors interest,” said an exchange official.

These Sebi reports have already highlighted three such mismatches and been forwarded to exchanges for reconciliation with members.

The rising incidence of 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.

In December 2018, Sebi introduced norms standardising 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 clients stocks and funds. Some other cases of alleged misuse include Kassa Finvest, Amrapali Aadya Trading & Investment Ltd, Ficus Investments.

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