Market regulator Securities and Exchange Board of India (SEBI) has penalised stock exchanges BSE and NSE with penalties worth ₹3 crore and ₹2 crore, respectively, for "laxity" in detecting the scam at Karvy Stock Broking Ltd (KSBL).

Both the stock exchanges have been asked to pay the penalty within 45 days of receipt of the order, SEBI said. Karvy had misutilised client securities worth ₹2,300 crore belonging to more than 95,000 clients, by unauthorisedly pledging them from just one demat account.

The funds raised against the pledge were used by Karvy for itself and its group entities. As per the forensic audit report of Karvy, the total value of securities pledged by it was ₹2,873 crore against which ₹851.43 crore were raised from 8 banks and NBFCs.

"The scale of misuse by KSBL points to the loss to investors, which can potentially be caused when irregular conduct is not detected on time," the SEBI order against the exchanges said.

After the scam was unearthed, SEBI had directed depositories to allow the transfer of securities from the said demat account to respective beneficial owners who had paid in full against the securities under the supervision of NSE.

Securities worth ₹2,300 crore of 2.35 lakh Karvy investors were settled after the SEBI order.

"Without doubt, it was KSBL, which misused clients' securities by unauthorisedly pledging them and was thus responsible for the loss caused by pledging securities, which it did not own, including the loss to investors as well as loss to banks and NBFCs, who loaned funds to Karvy against securities which did not belong to KSBL," the order added.

The SEBI order said, however, that it can't be ignored that Karvy, being a member of NSE (National Stock Exchange) and BSE (Bombay Stock Exchange), was under their regulatory supervision. "As established in the foregoing paragraphs, there was laxity on the part of noticee (NSE and BSE), which resulted in delayed detection of the misconduct by Karvy and the noticee(s) need to be held accountable for the same," the market regulator said in two separate orders.

The SEBI order comes after it probed details of the actions, including reconciliation of the clients' securities, taken by both NSE and BSE between 2016 and 2019. After the scam came to the light, SEBI had passed an ex-parte order against Karvy in 2019, following which the clients' securities were recovered.

As of November 2020, securities worth ₹2,300 crore belonging to 2.35 lakh Karvy investors were settled. The case also forced the market regulator to bring in changes in rules around pledging of shares by doing away with the 'power of attorney' concept to discourage brokerages from getting access to clients' securities.

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