Karvy Stock Broking Pledged Client Securities, Diverted Funds to Group Companies; SEBI Cancels KSBL's Registration
Market regulator, the Securities and Exchange Board of India (SEBI) has cancelled the certificate of registration of Karvy Stock Broking (KSBL).
SEBI had received a preliminary report dated 22 November 2019, from the National Stock Exchange (NSE), containing its observations of the inspection of KSBL.
It was observed in the NSE-IR that KSBL was raising funds by pledging client securities and diverting the funds raised to related entities.
The SEBI order said that a sample fund trail exercise was undertaken by the forensic auditor of the bank statements of KSBL, and it was observed that there were transactions from the bank accounts earmarked as 'client bank accounts' by KSBL to the 'own bank accounts' of KSBL.
It was also noted that such funds were, in turn, transferred to the group companies of KSBL.
Securities of clients who had no negative balance (i.e., zero or credit balances) were also pledged by the noticee. These securities were transferred to KSBL margin/beneficiary accounts without obtaining consent from the clients. Furthermore, KSBL also did not follow the stock lending and borrowing mechanism to borrow stocks from clients, SEBI order said.
It is, however, observed that KSBL had pledged client securities amounting to Rs2,700 crore beyond 30 September 2019 which is a violation of the provisions.
Further KSBL, by pledging the securities of the clients in the manner described above and continuing to do so even after a specific direction by SEBI prohibiting such pledging of securities of clients has violated the circular dated 20 June 2019.
It is noted from the records that, as on 22 November 2019, KSBL had not settled funds to the extent of Rs527.18 crore and securities worth Rs2,862.05 crore which were returnable to its clients, the order said.
It is noted that out of the additional borrowings of Rs1,531.90 crore, during the period 1 April 2019 to 30 September 2019, Rs1,228.36 crore was given as loan/advances/investments to group companies (Rs428.36 crore were given as advances for investment in subsidiaries and Rs 800 crore was given towards loans/receivables from subsidiaries).
The FAR also records, based on an analysis of the total inflow/outflow between KSBL and its Group Entities, that an net amount of approximately Rs1,120 crore was transferred from KSBL to its various Group Companies from FY 2017 till 19 October 2019, the order said.
KSBL had not reported six own bank accounts (stock broker-own accounts) to stock exchanges as required under the Circular dated 26 September 2016. It is also noted from the FAR that KSBL had credited funds raised by pledging client securities to these six own bank accounts.
NSE had undertaken a sample analysis of the funding provided to KSBL's top 25 debit balance clients, and it was noted that KSBL had provided funding for 13 of the said 25 clients.
The noticee, by funding the positions of these clients, has compromised its risk management procedures and contravened the provisions of the Circular dated 26 September 2016, the SEBI order said.
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1 year ago
Take criminal action
1 year ago
Aren't these acts of Karvy Stock Broking (KSBL) and its officials who directed and/or executed these transactions criminal acts under CrPC , regardless of provisions of SEBI Act. Has SEBI initiated any such action? What action, if any, was taken for protecting investors interest (i.e. compensation) who were so defrauded?
Virendra Jain
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