Stocks

Karvy mess: Who is to blame?

PALAK SHAH Mumbai | Updated on November 26, 2019

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The Karvy case has brought to the fore the systemic breakdown in India’s capital market. While the market regulator SEBI, the stock exchanges (National Stock Exchange and BSE) and depository participants (NSDL and CDSL) have often fallen over each other to claim credit for the unprecedented growth of the capital market over the past two decades, when it comes to answering tough questions at times like these, they maintain a silence.

The blame for the recent spate of broker defaults, especially what happened with the clients of Karvy, has to be shared by these very regulator entities, experts tell BusinessLine.

Responsibility of NSE, BSE

The chief responsibility of the NSE and the BSE is to contain the ‘bad behaviour of brokers’. As members of these stock exchanges, brokers fall under their command and are regulated by them. Stock exchanges are responsible for conducting routine and frequent inspections of brokers, which they claim to do.

If they have indeed inspected Karvy Stock Broking, then how has its activities, some of which very nearly amounts to duping of clients, gone unnoticed for months? The NSE probe report against Karvy, which has not yet been fully disclosed, but has been quoted in parts by SEBI, says that Karvy has been transferring and pledging client shares for several months. Not just Karvy, there are several other brokers doing that. Why was this not stopped or any questions asked? Why were more hens allowed to be slaughtered?

In fact, NSE and BSE should be held accountable for not paying attention to client complaints against Karvy and other brokers, which have been flooding the social media space for months now. Are these stock exchanges merely IT companies, whose officials sit in plush corporate offices? Exchanges, as the first level regulators, should have their ears to the ground, at least on matters concerning their members. If the brokers overstep the rules, both NSE and BSE should also be blamed. The NSE probe report, Karvy’s collateral, and the full picture of default has still not been fully disclosed.

Depository participants – NSDL and CDSL

It appears that no lessons have been learnt from the IPO scam. Brokers using fictitious client accounts have been exposed. Several retail clients have been making a hue and cry about their power of attorney being misused by brokers. But NSDL and CDSL, which hold shares in their demat accounts, did not think it important to analyse the situation and act accordingly. As the NSE probe report points out, Karvy was even allowed to transfer shares from dormant accounts. Pledging and un-pledging of third-party shares by Karvy continued under the nose of NSDL and CDSL. Even after receiving client complaints, NSDL and CDSL did nothing effective. Why did they not share the blame?

Banks

Banks can give the retail client a tough time when it comes to due diligence on housing loans. But brokers and large players such as Karvy received finance from some large private banks on “third party” collateral. No question of due diligence here. Did the banks ask any questions or raise the issue with regulators even as client complaints were floating in the media?

SEBI

SEBI has spent millions of rupees on its integrated surveillance system. Yet, for months, it could not detect simple social media rants against Karvy and other brokers. In fact, the regulator has been flooded by client complaints against brokers. The mere prescription of a ‘reporting pill’ has proved ineffective; the heat has to be increased. SEBI has to answer why its action is slow and not forthcoming? It has to answer why it does not come down heavily on stock exchanges for their lapses? Who is SEBI accountable to?

Published on November 26, 2019

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