Karvy crisis: Sebi gives time to six brokers to wind up client accounts

The Securities and Exchange Board of India (Sebi), in the wake of the Karvy crisis, has given time to at least six brokers to wind up their client securities accounts and submit the progress reports on pledged securities used to raise money from banks and finance firms.

Source said Sebi had identified some brokers, mostly mid-sized ones who had not just failed to separate client shares but raised loans and utilised them in their other ventures.

The inspection report will detail the transactions made outside the brokerage business but assurance has come that the brokers are in the process of meeting the set of rules Sebi has prescribed in the June circular, said two people privy to the development.

Sebi wants these brokers to remove the pledges and return the shares to the clients (those who paid the dues).

Typically, brokers pledge client shares for multiple purposes — for raising funds from banks, making up any shortages in margins of other clients for their proprietary trading, and so on. The issue arises when they divert those funds to other ventures and are unable to pay back the client money.

Sebi’s June circular barred trading members from pledging certain securities of clients to banks and non-banking financial companies (NBFCs) to raise funds even with their authorisation.

Also, it asked them to separate clients’ unpaid securities accounts by August 31 with regard to securities that had not been paid in full by the clients. The provisions of the June circular were to be applicable from September 1.

Meanwhile, it is also learnt that several lenders have reached out to Sebi, seeking clarity on loans they have sanctioned based on the collateral given by these brokers.

At present, lenders have no means of knowing who the beneficiaries of securities are because there is no disclosure mechanism for that.

In the Karvy case, lenders such as Bajaj Finance, HDFC, and ICICI Bank had sanctioned loans to the group for the shares pledged as collateral.

“Lenders should do more due diligence by checking from depositories about the shares being offered by the broker for pledge and whom they belong to. In the case of default, lenders should be paid by borrowers,” said one of the two person cited above. 

Sebi rules have clarified that securities lying with a trading member in a client collateral account, client margin trading account, and client unpaid securities account cannot be pledged or transferred to banks/NBFCs for raising funds by a trading member.

The crisis at Karvy Stock Broking and BRH Wealth Kreators (formerly BMA Wealth Creators), among others, surfaced after the National Stock Exchange, during an inspection, highlighted mishandling clients’ securities and funds. 

Sources said some brokers disposed of pledged shares after clients refused to take them back, and this had led to a heavy selloff in mid-cap stocks in September, the deadline to comply the rules.