Compensation claims plunge as Sebi crackdown intensifies

 

 

As of May 31, NSE’s fund had a corpus of Rs 2,065 crore and that of the BSE had Rs 673 crore, the data showed.

The Securities and Exchange Board of India (Sebi)’s crackdown on stockbrokers’ misuse of client funds and securities has resulted in a significant fall in compensation claims filed by defrauded investors since the peak during the Karvy scandal.

In FY24, the National Stock Exchange (NSE) received 164 compensation claims, a drop from 758 claims in FY23, 3,009 in FY22 and the peak of 68,518 in FY21, according to the latest data.

A similar downward trend can be seen through the claims paid by the NSE, though many have not yet been processed. In FY24, NSE disbursed over Rs 52 crore, compared with nearly Rs 129 crore paid in FY23, Rs 535 crore in FY22 and Rs 552 crore in FY21, data show.

As of May 31, 2024, NSE paid nearly Rs 12 crore to defrauded investors.Any investor can claim up to Rs 25 lakh from the NSE and Rs 15 lakh from the BSE through their respective investor protection fund (IPF) in the event of defaulters’ assets not being sufficient to meet the amount lost.

As of May 31, NSE’s fund had a corpus of Rs 2,065 crore and that of the BSE had Rs 673 crore, the data showed.

Major frauds by Karvy Stock Broking, followed by Anugrah Stocks & Broking, were key triggers for the markets regulator to turn proactive in preventing misuse by stockbrokers. Though NSE declared both the brokerage houses as defaulters in November 2020, their activities had come to light much earlier in 2019, said experts.

“In response to past defaults by Anugrah and Karvy, Sebi has comprehensively revamped the regulatory framework. However, claiming the compensation amount can be a complex process, even for Sebi or the exchanges to recover from defaulters to give it to investors, leading to frustration,” Sumit Agrawal, founder of Regstreet Law Advisors and a former Sebi official, said.

By implementing measures such as direct payout of securities, margin funding, collateral requirements, more disclosures, stricter rules for fund transfer and power of attorney, Sebi’s actions are reshaping stockbrokers’ accountability and role, experts said.

“To protect investors and avoid any misuse or manipulation, Sebi has overhauled the entire regulatory framework for stockbrokers, making it full-proof by monitoring every movement of funds and securities,” KC Jacob, counsel at Economic Laws Practice, said. “Not just brokers, but Sebi has issued norms for other market infrastructure intermediaries like depositories and clearing corporations to be able to prevent any such misuse.”

Nithin Kamath, founder and CEO of Zerodha, said on the social media on Friday, “Since 2019, Sebi has brought in several changes that have made our markets safer and more investor-friendly. It started with segregation of client funds, compulsory quarterly bank runs on brokers (quarterly settlement), removing pooling of funds for MF transactions and more.”

To further smoothen the process, Sebi has recently mandated direct payout of securities by clearing corporations into clients’ demat accounts, doing away with the earlier method of pooling of securities in the broker’s demat accounts.In another move, Sebi has proposed to increase the limit for a basic services demat account from the current Rs 4 lakh to Rs 10 lakh, effectively reducing the annual maintenance charges (AMC) paid by account holders.

“The reduction in the AMC is, in a way, a result of the gradual reduction in a broker’s role. In the not-so-distant future, I wouldn’t be surprised if all that the brokers will be doing is just processing orders,” Kamath said.

Agrawal pointed out that these measures by Sebi might be perceived by stock brokers as “overly strict”, and have been a pain point. “The compliances expected are substantial in size and net worth-agnostic, leading to a one-norm-fits-all approach,” Agrawal said.