Karvy debacle: Bourses get show cause notice

Mumbai: Stock exchanges are under fire from the capital markets regulator for the Karvy debacle. People with direct knowledge of the matter said the Securities and Exchange Board of India (Sebi) has sent show cause notices to both BSE and National Stock Exchange in the matter. The notices allege that the bourses along with other market infrastructure institutions (MIIs) failed to detect the scam in a timely manner.The Hyderabad brokerage had transferred large amounts of shares from client accounts to its own accounts using power of attorney given by its clients. These shares were subsequently pledged to banks to avail loans. Sebi is learnt to be of the view that such large movement of shares from one account to another ought to have been red-flagged by the exchanges.The development assumes significance as some of the lenders of Karvy are demanding the market regulator to pay off their losses due to the Karvy episode from the Investor Protection Fund (IPF) – a rainy-day fund that exchanges maintain to take care of investors in case of big scams. A prayer to this effect has been made to the Securities Appellate Tribunal (SAT).Emails sent to Sebi, BSE and NSE remained unanswered.“Sebi’s investigation involves an array of MIIs including the depositories, clearing corporations, and some of the other market institutions could also receive notices in the days to come,” said one of the persons. “Proactive surveillance of brokers is amongst one of the key responsibilities of the stock exchanges.”A show cause notice is sent by Sebi upon completion of its probe. Once the exchanges reply on the matter, it will go to an adjudication officer, who will pass a final order.The shares that were uprooted from the client accounts were used by Karvy to pledge with the banks and avail loans on behalf of other business entities of Karvy Group. The beleaguered broker availed loans of Rs 2,300 crore from at least four financial institutions including HDFC Bank, ICICI Bank, Bajaj Finance and IndusInd Bank.However, in November 2019 when the scam came into light, Sebi passed an order asking the bourses to return the shares pledged by Karvy Stock Broking to the original owners of the shares i.e., clients of Karvy. Hence, the security cover provided by Karvy to the financial institutions vanished overnight. These lenders challenged the Sebi order in SAT and a final verdict in the matter is pending.“While the clients of Karvy received their shares back, the banks have been left high and dry and they may not be able to collect their dues,” said another person. “One key question that needs attention is how exchanges and depositories allowed such encumbrance on the shares to happen.”The stock exchanges have already dipped into the IPF in the Karvy case – to compensate the investors who could not get their shares back. While the exact amount of money used by NSE to pay Karvy investors is not known, total claim payouts worth Rs 277 crore were made by NSE in FY21 from its IPF account, data showed.

from Economic Times https://ift.tt/2MBpUg4