Cracking the whip on brokers who misuse the funds of customers, the National Stock Exchange and the BSE on Monday suspended Karvy Stock Broking’s trading licence for all segments due to non-compliance of the regulatory provisions of the bourses. Simultaneously, the National Securities Depository Ltd (NSDL) said nearly 90 per cent — 82,559 — of duped investors have got back their securities and the remaining ones will get after clearing their dues.
On the other hand, Securities and Exchange Board of India (Sebi) rejected Karvy’s plea to use its clients’ power of attorney (PoA) to settle trades done by them as the broking firm illegally transferred securities worth Rs 2,300 crore of more than 95,000 clients.
Focus on EY report; Sebi may have to look into similar cases
Sebi had earlier said Karvy Stock Broking transferred Rs 1,096 crore of investors’ money to its real estate subsidiary. However, it’s not clear how and where was this money used by its real estate arm. The forensic audit of Karvy Stock Broking by EY is expected to bring out more details on the fund diversion. Now, it’s to be seen how banks will recover the funds lent to Karvy. The market regulator should look into similar fund diversion from clients’ accounts by other broking firms.
In two separate circulars, the bourses announced that they “have suspended Karvy Stock Broking Ltd with effect from December 2, 2019 due to non-compliance of the regulatory provisions of the exchange”. The BSE said it has deactivated trading terminals of Karvy in equity and debt segment and put them in the risk reduction mode in equity derivatives, currency derivatives and commodity segment.
Sebi’s directive had come after the National Stock Exchange forwarded a preliminary report to it on the non-compliances observed with respect to pledging/misuse of client securities by Karvy. The exchange’s preliminary report is the result of the limited purpose inspection of Karvy conducted by it on August 19, covering a period from January 1 onwards, Sebi had said in its order.
In an order passed on November 22, Sebi barred Karvy from taking new clients in respect of its stock broking activities and also prevented it from using the power of attorney (PoA) given by clients after the broker was found to have allegedly misused clients’ securities.
The NSDL said 82,559 investors them have got back their securities, which were illegally transferred by the KSBL to its own account. “As per the directions of Sebi and under supervision of NSE, securities have been transferred from the demat account … named Karvy Stock Broking Ltd to the demat accounts of respective clients who have paid in full against these securities. The number of such clients who have received securities are 82,599,” NSDL said in a circular.
Karvy had earlier taken loans to the tune of Rs 600 crore by pledging securities worth more than Rs 2,300 crore of 95,000 clients with lenders.
In another order passed on Friday, Sebi said it would not be prudent to allow the use of PoA (power of attorney) by Karvy given to it by its clients. It clients of Karvy who seek to sell securities through the broker may do so by using electronic or physical Delivery Instruction Slip (DIS) only. A DIS is used by sellers of securities to instruct their depository participant to debit their demat account. The order also highlighted that Karvy, in one demat account under its name on the BSE, unauthorisedly transferred securities worth Rs 2,300 crore of more than 95,000 clients, into this account, by misusing the PoA given by its clients. This demat account was never disclosed by the firm in its filing with exchanges.
The securities of fully paid clients were also pledged by Karvy Stock Broking to generate funds for its own/group entities use. Apart from misutilisation of client funds, KSBL continued to create additional pledges on client securities even after Sebi regulations prohibiting firms from doing so became effective from October 1.
Sebi said forensic audit of KSBL, initiated by the NSE, is in progress and the full magnitude of the mis-utilisation of the clients’ securities will be known after completion of the forensic audit.
The latest Sebi order came after the Securities Appellate Tribunal (SAT) on Friday directed Sebi to look into the issue of clarification sought by KSBL with regard to usage of PoA given by clients. The tribunal had asked the regulator to pass an appropriate order after giving an opportunity of hearing by December 2, 2019. Prior to that, KSBL had also written to Sebi requesting it to permit the continuation of KSBL using the PoA only for the limited purpose of transfer of securities to the pool account solely for settling the clients’ pay-in obligations to stock exchanges.
The forensic audit of Karvy Stock Broking by EY is expected to bring out more details on the fund diversion from KSBL to its real estate arm. Sebi has said KSBL transferred Rs 1,096 crore of investors money to its real estate subsidiary. However, it’s not clear how this money was used by its reality division. “The funds diverted could be higher also,” said a source.