Recently, capital markets regulator Securities and Exchange Board of India raised several concerns against Karvy Stock Broking Ltd (KSBL). According to Sebi, KSBL used its proprietary (own account) as a client account instead of using the former only for settlement of proprietary trades. KSBL pledged the securities belonging to clients (in the above accounts) with six of its own banks and these bank accounts were not reported to the exchange. Sebi said that a net amount of ₹1,096 crore (clients’ pledged shares) were transferred by KSBL to its group company, Karvy Realty Pvt. Ltd, between 1 April 2016 and 19 October 2019 via off-market deals. Further, KSBL did not report the depository participant (DP) account in the submissions made to NSE from January 2019 to August 2019, which came to notice during an inspection by NSE. The NSE report finds that there are numerous transactions in this unreported DP account whereby securities of clients have been moved.
In June 2019, Sebi tightened regulations on proprietary trading making it compulsory for brokers to transfer pledged securities back to clients’ accounts within a day of receiving the payment. In case of a default in payment by the client, brokers can hold the securities for a maximum of five days, post which they are supposed to liquidate the securities in the market and recover the dues. Further, Sebi has categorically specified that the securities lying with brokers for non-receipt of payment from clients cannot be used by the broker as collateral margin for any of the proprietary trades and cannot be pledged with financial institutions. Brokers were supposed to release all such pledges by August 2019 (the deadline was extended to September 2019). The regulation hit brokers, especially those who did not have enough funds to revoke pledges.
But as a client, what can you do to safeguard against such incidents? Here’s a checklist.
Verify your client master list details
The client master list (CML) that is given at the time of account opening should be checked thoroughly for all the details mentioned, especially the mobile number and email ID. This is very important, as the depository sends SMS alerts for any debit transaction in the client’s depository account. According to Sebi’s order, KSBL had transferred securities off-market from client accounts who had not executed a single trade with them. This could have been prevented as the debit transactions in DP accounts are reported directly to clients through SMS.
Also, in case you haven’t used your account for a long time, you should request the depository to freeze the account. This does not impact any corporate action such as those related to dividends, bonus or splits, in the client’s portfolio. Whenever you want to trade again, you can unfreeze the account.
Check margin statements regularly
You should regularly check your margin statements, which define the cash or collateral margin that is available with the broker. The broker is liable to share the details of securities or cash margin available for the client, as per the regulations, for all open positions (till the position is settled at an exchange level).
Check demat statements
You get a demat statement at least once a year, as defined under the regulations. It’s very important to check it when a power of attorney (PoA) is given. Further, brokers need to provide the quarterly settlement (not exceeding 90 days) of funds and securities, as per the regulations. You can check your unutilized funds and securities. Regulations stipulate that any unutilized funds and securities must be transferred to the client’s account. Check your DP holdings and transaction statements for reconciliation, on a monthly basis.
Nitin Singh is managing director and head, Standard Chartered Wealth Management, India