SEBI Probes Exchanges, Brokers for Failure to Detect Karvy Fraud

An NSE audit found that Karvy Stock Broking pledged 20 million rupees in client securities with various lenders to raise funds for its own use.

SEBI (the Securities and Exchange Board of India) is investigating stock exchanges and about a dozen brokerage firms for their apparent failure to detect a INR 20 million (USD 279,000) fraud at local brokerage Karvy Stock Broking Ltd.

Last week, SEBI barred Karvy from taking on new clients and from executing trades on their behalf, after the NSE (National Stock Exchange) discovered that the company may have misused client securities without client authorisation to raise funds for its own use, in violation of new rules.

An NSE audit found that Karvy had pledged INR 20 million in client securities with various lenders without authorisation.

SEBI is trying to find out why the exchanges failed to spot lapses at Karvy, preventing early detection of the suspected fraud, and whether more broking firms engage in similar practices, reported Mint.

The regulator is also examining why the exchanges failed to detect that Karvy had illegally pledged client shares to raise money.

“Exchanges are required to conduct regular annual inspection of brokers, but in Karvy’s case, they failed to detect instances of misutilisation of client money by the broking firm at an earlier stage,” a SEBI official told Mint.

“The exchanges are first-line regulators and should be cognisant of any misutilisation of client securities and should have flagged it.”

The transactions in question were said to have taken place took place as far back as 2016, but they were only detected this year in an NSE audit, the report said.

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