Karvy crisis:Six brokers get breather from Sebi

The stock broking industry in India is undergoing an unpredicted shakeup.The Security and Exchange Board of India (Sebi) has given time to brokerages to wind up their client securities accounts and asked to submit the report on pledged securities which are used to raise money from bank and finance firm.On Wednesday SAT bench(Securities Appellate Tribunal) which comprise of C K G Nair,Justice MT Joshi said no further reilief to top lenders who had petitioned against the transfer of securities held with karvy Stock Broking Ltd back to the clients.

Sebi had founded some brokers mainly mid-sized ones who has failed to separate client share,they raised loans and utilized it in there on ventures.ICICI bank ,HDFC bank and Induslnd bank had also argued that most of the securities have been used to borrow money from them.These bank had also asked the tribunal to take back the securities or freeze them in an escrow account(account where funds are held in trust whilst two or more parties complete a transaction).Sebi wants the brokers to remove the pledges and return shares to clients.

The case exist to the securites held by karvy,which were reportedly used by the brokerage for borrowing courtsey the power of attorneys that they had.The private sector banks also joined the petition on Tuesday.On November 22,Sebi forced KSBL to not take new clients for stock borrowing activites and also prevent it from using the power of attorney.Naturally,Brokers pledged client share mainly for raising fund from bank,to make up shortages in other clients for their proprietary trading,but the brokers divert those funds to other ventures and they were unable to pay back the client money.

Sebi’s june circular restricted trading members from pledging some securities of clients to bank and non-banking financial instituion.It also asked the brokers to separate client’s unpaid accounts securties with securities that had not been paid in full by the clients.These provison were applicable from September 1 onwards.But there is problem that when lenders seeked Sebi about the clarity over the loans that they have sanctioned which are based on the collatreals given by the brokers, it was found that there is no such mechanisim to identify whether collaterals belongs to clients or not.There is no disclosure mechanism to know the beneficiariesof the securities.

Sebi rules tells that”securities lying with trading members in client collatral account ,client marging trading account and client unpaid securities accountshall not be permitted to be pledged or transferred to banks/NBFC’s for raising funds by trading members. SAT bench asked the lenders to approach Sebi on December 6.The personal hearing to the aggrieved parties and pass an order by December12.