Seize the scam
To an outsider, it may well appear that India’s financial sector is under siege. After the collapse of Non Banking Finance Companies such as IL&FS last year, the unravelling of Dewan Housing and Finance Ltd (DHFL) and PMC Bank and the troubled state of many banks, securities market regulator, Sebi, has banned Karvy Stock Broking Ltd which has over 2 lakh clients, from undertaking fresh business, for allegedly misappropriating money and securities belonging to its clients to fund its real estate arm, Karvy Realty. The regulatory action follows the inspection report of the National Stock Exchange, which found that the stock broking firm had transferred Rs 1,096 crore to its real estate business by misusing the power of attorney given to its clients to sell securities apparently through entities controlled by it.
It is but natural that there is concern about possible similar violations by other large broking firms too — something the regulator is now probing. The Karvy Stock Broking scam isn’t like the routine cases that Sebi disposes of often, involving minor stock brokers. It features diversion of funds of a much bigger scale and blatant violation of regulatory rules which stipulate segregation of accounts of clients and proprietory trades. The fact that a financial services group, now the top registrar and transfer agent in the country, which claims to service every third citizen in the securities market and 60 per cent of the Sensex/NSE 500 companies, was at the heart of this is bound to further erode investor faith.
On the face of it, Sebi appears to have tightened its rules relating to stock brokers — the last being in June this year. Even if there is no systemic issue, a full inspection of the books of other large stock broking firms should help, on the lines of the Accelerated Quality Review of banks by RBI which contributed to exposing a lot of divergences, notwithstanding the near-term fallout in the markets. The latest development offers an opportunity to debate the new challenges to regulation, the balance to be struck in oversight and whether there should be fetters or not on unrelated diversification for firms in the financial sector. A look at the model and experience of other jurisdictions would also help.