SEBI Issues Rs5.15 Crore Demand Notices to BSE, NSE in Karvy Stock Broking Case
Moneylife Digital Team 17 June 2022
Market regulator Securities and Exchange Board of India (SEBI) has sent notices to stock exchanges BSE and NSE asking them to pay over Rs5 crore in a case related to Karvy Stock Broking Ltd (KSBL) and warned them of attachment of assets and bank accounts if they fail to make the payment within 15 days. The notices came after the exchanges failed to pay the penalty imposed on them by the market regulator.
 
In an order on 12th April, SEBI had slapped a penalty of Rs3 crore on BSE and Rs2 crore on NSE in two separate but similarly worded orders, for 'laxity' on their part in detecting misuse of clients' securities by KSBL.
 
The matter relates to KSBL misutilising client securities worth Rs2,300 crore, belonging to more than 95,000 clients, by pledging them from just one demat account. The funds raised against the pledge were used by KSBL for itself and its group entities. The scale of misuse by KSBL points to the loss to investors which can potentially be caused when irregular conduct is not detected on time.
 
KSBL and its group entities utilised this money for raising Rs851.43 crore from eight banks and non-banking finance companies (NBFCs).
 
"Without doubt, it was KSBL which misused clients' securities by unauthorisedly pledging them, and was thus responsible for loss caused by pledging securities which it did not own, including loss to investors as well as loss to banks and NBFCs who loaned funds to KSBL against securities which did not belong to KSBL," as per the orders passed by the market watchdog on 12th April. SEBI added that the exchanges had a 'casual approach' while scrutinising Karvy in the previous years. 
 
SEBI noted that KSBL, being member of BSE and NSE, was under regulatory supervision of the exchanges. “There was laxity on the part of exchanges, which resulted in delayed detection of the misconduct by KSBL and the bourses need to be held accountable for the same,” SEBI had stated.
 
In two separate notices, SEBI directed BSE and NSE to pay Rs3.09 crore and Rs2.06 crore, respectively, along with further interest, all cost, charges and expenses within 15 days. These amounts include penalty, interest from 12th April till date and recovery cost.
 
In the event of non-payment of dues, the market regulator will recover the amount by attaching and selling the Exchanges' moveable and immoveable properties. Besides, the bourses face attachment of their bank accounts. Also, the regulator takes the route of arrest and detention in prison to recover the amount.
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