Sebi penalises clearing corporations for violations in Karvy Broking case

The Securities and Exchange Board of India (Sebi) has penalised NSE Clearing Corporation Limited (NCL) and Indian Clearing Corporation Limited (ICCL) for violations of its early warning mechanism (EWM) norms in the matter of Karvy Stock Broking Limited (KSBL).

In an order issued on Wednesday, Sebi imposed a penalty of Rs 50 lakh on ICCL and Rs 25 lakh on NCL for not alerting the stock exchanges regarding diversion of client’s securities by KSBL.

The broking firm had misused securities from clients through unauthorised pledging which were used to raise funds from several banks.

In the show cause notice, it was alleged that despite receiving relevant information from National Securities Depository (NSDL), the clearing corporations failed to provide any alerts to the exchanges.

In its defence, NCL submitted to Sebi that it clears and settles trades executed on NSE and therefore passed on the information only to NSE, which is the concerned stock exchange and not to BSE.

The capital markets regulator noted that NCL had partially complied with the EWM circular by compiling mismatch and sharing alerts with NSE, though there is a mechanism for interoperability for alerting other stock exchanges.

Meanwhile, ICCL, which failed to alert both NSE and BSE, claimed that the showcause notice failed to take into account that KSBL did not clear and settle its trades with them post June 2019. However, Sebi’s order is based on the data sought for the period February-November 2019. 

Sebi in its order has noted that MIIs carrying out important risk management related functions, and even a partial non-compliance of EWM can potentially have market wide impact. Hence, the violation cannot be treated lightly.

Prior to this, Sebi in an order in April, slapped a penalty of Rs 3 crore on the BSE and Rs 2 crore on the NSE for “laxity” in detecting misconduct by KSBL.