Karvy Stock Broking Ltd
Karvy Stock Broking Ltd

Opinion | Sebi’s dilemma

The regulatory mechanism requiring brokerages to keep their own and client securities in separate accounts was tightened earlier this year

Lenders are up in arms over the move by the National Securities Depository to transfer stocks from Karvy Broking’s demat accounts to those of its clients, following allegations that the broker used these as pledges to raise money from banks and credit companies. The Securities and Exchange Board of India, the stock market regulator, had directed the depository to transfer the pledged shares to Karvy’s clients in order to safeguard investors. This may sound fair. But it also leaves lenders that had lent money to Karvy against those assets out on a limb. The securities tribunal, where the lenders have taken their grievance, has asked the stock market regulator to hear their submission and issue suitable orders.

The regulatory mechanism requiring brokerages to keep their own and client securities in separate accounts was tightened earlier this year. The new rules also require depositories and stock exchanges to keep a tighter vigil against delinquency. The Karvy case, however, has left a lot of red faces all around, and perhaps stiff action was only to be expected. The stock exchanges have cancelled Karvy’s registration on charges of violating rules on returning the securities of clients. But the move directing the National Securities Depository to transfer stocks held in Karvy’s demat account to its clients deprives lenders of collateral against which they have lent money, and they are within their rights to seek legal recourse.

The stock market regulator will have to walk a fine line in this matter because secured loans against shares form a sizeable chunk of bank lending.

Close