Securities market regulator, the Securities and Exchange Board of India (SEBI), on Friday barred Karvy stock broking Ltd from taking new orders and executing trade. SEBI banned Karvy for alleged misuse of clients' funds worth Rs 2000 crore. The company has also defaulted on the payments of the same amount.
As per SEBI's order, the firm misused the collateral from the clients for its own trade. The SEBI intermediary regulations bar brokerage firms to create additional pledges on clients' securities.
In order to prevent further misuse of securities, the market regulator has banned Karvy from taking any more clients in respect of its stockbroking business until the time it completes investigations. Moreover, Karvy has also been banned from acting on behalf of its clients. SEBI has directed National Securities Depository Limited (NSDL) and Central Depository Services Ltd (CDSL) not to act upon any instruction given by Karvy in pursuance of power of attorney given by its clients.
Notably, despite numerous claims and regulations by the SEBI, this is one of the biggest cases of broker defaults in the equity segment. The firms at Dalaal Street continue to brazenly misuse the clients' money and securities for its own purposes. Interestingly, earlier this year, the clients of Karvy reached out to the Prime Minister's Office (PMO) as the firm defaulted on the payments.
The SEBI order has argued that the Karvy created a pledge on these securities and generated funds despite not having any legal rights. The order read, "Even if the client securities were pledged, it should be (used) only for meeting the obligation of the respective clients." An investigation by National Stock Exchange (NSE) showed that between April 2016 and October 2019, Karvy had transferred a net amount ₹1,096 crores to its group firm Karvy Realty. As per a Times of India report, top global audit firm EY has been appointed for carrying out forensic audits.
Karvy denies any misuse of clients' securities
However, Karvy has denied any misuse of its clients' securities. As reported by The Hindu Business Line, Karvy said the SEBI order, "in no way prevents us from continuing to transact business on behalf of our existing clients as per their instructions, and in furtherance of investor best interests." The firm further went on to add that the order by the market regulator is temporary in nature and it expects the same to be ceased in the near future.