SEBI Bars Karvy Stock Broking From Taking New Clients for Misusing Client Securities
Moneylife Digital Team 22 November 2019
Market regulator Securities and Exchange Board of India (SEBI) on Friday prohibited Karvy Stock Broking Ltd (KSBL) from taking new clients due to alleged misuse of clients' securities. SEBI's ex-parte interim order came after National Stock Exchnge (NSE) forwarded a preliminary report to the regulator on the non-compliances observed in pledging and misuse of client securities by KSBL.
 
In a 12-page ex-parte interim order, Ananta Barua, SEBI's whole-time member (WTM) stated, "The securities lying in the depository participant (DP) account actually belong to the clients which are the legitimate owners of the securities. Therefore, KSBL did not have any legal right to create any kind of pledge on these securities. Even if the client securities were pledged, it should have only been for meeting the obligation of the respective clients, which was not observed in this case. Considering the issue of misuse of clients' securities by KSBL in an unauthorised manner, for its own use and purposely not disclosing the DP account to the exchanges in their reporting create a serious doubt on the conduct and integrity of KSBL."
 
To prevent further misuse of clients' securities by KSBL, Mr Barua also directed depositories National Securities Depository Ltd (NSDL) and the Central Depository Services India Ltd (CDSL) not to act upon any instruction given by KSBL in pursuance of power of attorney given to KSBL by its clients, with immediate effect.
 
The NSE report observed that KSBL misused a power of attorney (PoA) given by its clients, stating that there is a 'need for urgent regulatory intervention to prevent further misuse of clients' securities'. KSBL sold client securities in the market in a disguised manner through its own controlled entities and used the funds for its purposes. 
 
"To hide its misdeed, KSBL has not even reported this DP account in its submissions to NSE from January 2019 to August 2019. It is only during an inspection by NSE, that this account came to notice. NSE report finds numerous transactions in the DP account where securities of the clients have been moved. Securities of clients received in pay out are transferred from the pool account to this account and also securities lying in the demat account of the client(s) are also transferred into and from this account misusing power of attorney given by the client," the report submitted to SEBI by NSE says.
 
According to the report, KSBL sold excess securities (securities not available in DP account) worth Rs485 crore through nine related clients till 31 May 2019. Further, KSBL has also transferred excess securities to six out of these nine related clients to the tune of Rs162 cores till 31 May 2019. 
 
On subsequent verification, it was observed that securities worth Rs257.08 crore, pledged on behalf of four clients out of the nine clients, were unpledged from 1 June 2019 to 22 August 2019 and securities worth Rs217.85 crore were recovered by KSBL from four out of the nine client accounts. KSBL also purchased securities in five out of the nine client accounts amounting to Rs228.07 crore during the period from 1 June 2019 to 8 September 2019. KSBL had undertaken the recovery or purchase of securities to recoup the securities shortfall, the report stated.
 
KSBL also transferred securities worth Rs27.8 crore, off-market, from the beneficial owner (BO) accounts of 156 clients who have not executed a single trade with them. Further, securities worth Rs116.3 crore were observed to have been transferred from 291 clients who have not traded with KSBL since 1 June 2019. Prima facie a net amount of Rs1,096 crore has been transferred by KSBL to its group company Karvy Realty Pvt Ltd from 1 April 2016 to 19 October 2019, the SEBI order shows.
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