The Securities and Exchange Board of India (SEBI) imposed a penalty of Rs 3 crore to BSE and Rs 2 crore to NSE for failing to detect misconduct by Karvy Stock Broking Ltd (KSBL). The financial service firm misused securities worth Rs 2,300 crore belonging to more than 95,000 customers without permission. The company and its subsidiaries used funds from eight banks to raise Rs 851 crore, SEBI said.

“Without doubt, it was KSBL that misused clients’ securities by unauthorisedly pledging them and was thus responsible for any loss incurred due to pledging securities it did not own, including losses to investors, banks and NBFCs who lent funds to KSBL against securities that did not belong to them,” SEBI added.

“It cannot be ignored that as a member of BSE and NSE, KSBL was under their regulatory supervision, and there was laxity on the part of Noticee, which resulted in delayed detection of the misconduct by KSBL, and the Noticee must be held liable for the same,” SEBI said in two separate orders against the country’s leading stock exchanges.

SEBI had reviewed details of inspection and action taken by NSE and BSE against KSBL between 2016 and 2019. It further ordered the exchanges to provide the procedure they followed to ensure the reconciliation of clients’ securities. SEBI found lapses on the part of both exchanges in its investigation. In 2019, the market regulator had passed an ex-parte ad-interim order against KSBL when the unauthorisedly pledging issue came to light. Actions taken by SEBI, depositories and exchanges helped KSBL’s customers recover their dues.