Karvy incident aftermath: Legal shadow cast over collateral business

The Karvy incident may result in the collapse of the loan-against-shares market as it raises questions over the sanctity of pledged securities, say experts

In the aftermath of the Karvy incident, lending against third-party collateral facility raises questions over regulations concerning banks and brokers which are at loggerheads. While the Securities and Exchange Board of India (Sebi) and National Securities Depositories (NSDL) have ordered the transfer of securities, which were kept as collateral, lenders followed the old business model of sanctioning loan against shares and allegedly overlooked certain parameters. Legal experts feel that this could lead to a collapse of the loan-against-shares market as it raises questions over the sanctity of the pledged securities.

“Before the pledged shares can be characterised as ‘collateral’, one has