Sebi bars Karvy Stock Broking from taking new clients

Sebi Friday banned Karvy Stock Broking Limited (KSBL) from taking new clients for alleged client defaults of around Rs 2,0000000000. On Friday, the NSE forwarded a preliminary report to the Securities and Exchange Board of India (Sebi) on the non-compliances observed with respect to the pledging/misuse of client securities by KSBL. The exchange’s preliminary report is the result of the limited purpose inspection of KSBL conducted by it on August 19, covering a period from January 1 onwards, Sebi said in an order. In its ex-parte interim order, Sebi Whole Time Member Ananta Barua said there is a “need for urgent regulatory intervention to prevent further misuse of clients’ securities”. The NSE report has revealed that KSBL transferred a net amount Rs 1,0960000000 to its group firm Karvy Realty between April 2016 and October 2019. KSBL sold excess securities (securities not available in DP account) to the tune of Rs 4850000000 through 9 related clients till May 31. Further, KSBL has also transferred excess securities to six of these nine related clients to the tune of Rs 1620000000 till May 31, 2019. On subsequent verification, it was observed that securities worth Rs. 257.080000000, pledged on behalf of 4 clients out of the aforesaid 9 clients, were unpledged during June 1, 2019 to August 22, 2019 and securities worth of Rs. 217.850000000 were recovered by KSBL from 4 out of the said 9 client accounts. Apart from prohibiting the entity from taking new clients in respect of its stock broking activities, the watchdog directed NSDL and CDSL not to act upon any instruction given by KSBL in pursuance of power of attorney given by its clients. “The depositories shall monitor the movement of securities into and from the DP account of clients of KSBL as DP to ensure that clients’ operations are not affected,” the order said. Sebi said the depositories and exchanges shall initiate appropriate disciplinary regulatory proceedings against KSBL for misuse of clients’ funds and securities as per their respective rules. The findings in the order are based on the prima facie examination of facts and prima facie violation of securities law, it added. Sebi also said the “order does not ipso facto entitle any client of the noticee (KSBL) to claim their funds, stocks and securities, which claims are to be taken by such clients with the concerned stock exchanges/ depositories in accordance with their respective bye-laws”. The directions would be in place pending forensic audit. KSBL has been given 21 days from the date of receiving the order to file objections or responses.