Mumbai / Karvy Stock Broking Ltd banned by Sebi over ₹2,000 crore client defaults

MUMBAI: The Securities and Exchange Board of India (Sebi) banned Karvy Stock Broking Ltd (KSBL) over client defaults worth Rs 2,000 crore with immediate effect. It’s been banned from taking on new clients and executing trades for existing customers.

This follows an investigation by the National Stock Exchange (NSE) which found that Karvy had allegedly sold client stocks pledged with it through associated entities. The regulator has told depositories not to act upon any instructions by Karvy Stock Broking on the basis of powers of attorney given to the brokerage house in order to prevent further misuse of client securities.

“There is need for urgent regulatory intervention to prevent further misuse of clients’ securities,” Sebi wholetime member Ananta Barua said in his ex-parte ad interim order late Friday. Sebi said depositories should monitor movement of securities into and from depository participant accounts of Karvy Stock Broking’s clients to ensure the latter’s operations are not affected.

The National Stock Exchange had said Karvy Stock Broking misused powers of attorney given by its clients. Karvy sold client securities in the market through entities it controls and used the funds for its own purposes.

“KSBL in order to hide its misdeed has not even reported this DP account no. 11458979, named Karvy Stock Broking Ltd (BSE) in the submissions made by it to NSE from January 2019 to August 2019,” the Sebi order said.

“It is only during inspection by NSE this account came to notice. NSE report finds that there are numerous transactions in DP account no. 11458979, named Karvy Stock Broking Ltd (BSE), whereby securities of the clients have been moved.”

The securities were transferred to this account, misusing powers of attorney, Sebi said. “The securities lying in the aforesaid DP account actually belong to the clients which are the legitimate owners of the securities,” the regulator said.

“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.”

This casts suspicion on the role of Karvy, Sebi said. “Considering the issue of misuse of clients’ securities by Karvy Stock Broking in unauthorised manner, for its own use and purposely not disclosing the DP account no. 11458979, named Karvy Stock Broking Ltd (BSE) to the exchanges in their reporting create a serious doubt on the conduct and integrity of Karvy Stock Broking Ltd,” the regulator said. Sebi observed that prima facie a net amount of Rs 1,096 crore had been transferred by Karvy Stock Broking to its group company, Karvy Realty.

Further, Karvy Stock Broking had sold excess securities to the tune of Rs 485 crore through nine related clients. It had also transferred excess securities to six out of these nine related clients to the tune of Rs 162 crore. On subsequent verification, it was observed that securities worth Rs 257.08 crore had been pledged on behalf of four out of the nine clients. Karvy also purchased securities amounting to Rs 228.07 crore between June 1to September 8 this year.