SAT Asks SEBI To Decide On Karvy’s Plea Seeking Power To Settle Trades

The Securities Appellate Tribunal asked the market regulator to consider Karvy Stock Broking Ltd.’s plea seeking nod to conduct certain transactions on behalf of clients after SEBI restrained depositories from acting on its instructions.

Karvy argued that it needed the powers to settle trades with exchanges for its clients as any delay will cause losses to them. The broker moved the appellate tribunal seeking a limited modification in the Nov. 22 order of the Securities and Exchange Board of India that had barred it from taking on new customers and from dealing with their money.

The regulatory action came after SEBI found that the broker had sold clients’ securities and used funds for its own purposes. The counsel for the broker informed the tribunal that it will separately explore legal options for challenging the main order.

SEBI opposed the modification of the order saying that it would lead to further misuse of the power of attorney by Karvy.

SAT, in an oral order, directed SEBI’s whole-time member to consider Karvy’s Nov. 24 and 25 representations on the ground that regulatory rules provide for an in-house mechanism for appeal. Therefore, Karvy must first approach the market regulator for seeking relief, it said, adding that the SEBI order resulted in Karvy’s inability to execute trades as it could not use the power of attorney.

It directed SEBI to provide clarification on or before Monday.

Here are the key arguments made by the parties:

Vikram Nankani, counsel for Karvy, sought modification of the order on following grounds:

• Use of clients’ power of attorney required for settlement of shares with the stock exchanges. Under the trading mechanism, shares in a demat account are transferred to pool accounts of clearing corporations, which are further transferred to the exchanges. The settlement procedure would be hampered if it is not allowed to act on client's behalf as per the power of attorney. Karvy is supposed to issue delivery instructions on trade+1 day (T+1) basis.
• Karvy has around 3 lakh clients, of which 20,000 trade daily on stock exchanges. They have already suffered Rs 8 crore loss. Exchange will auction shares and impose a penalty of 25 percent due to any delay in settlement, causing further loss to Karvy and investors.
• Karvy is already being monitored by the stock exchange and depositories, which can also monitor transfer of shares and utilisation of the power of attorney.
• Karvy proposed giving a solemn undertaking to SEBI but the regulator has not responded.
• Karvy couldn’t inspect the report relied upon by SEBI to issue an order against it.

SEBI opposed Karvy’s appeal on the following grounds:

• Karvy’s modification plea couldn’t be granted as there are ultimate methods which would allow it to provide delivery instructions to its clients. For instance, it may use a platform like WhatsApp.
• Relief must not be granted as the matter lacks any urgency. Payments to clients can be done within four days.
• No investor has complained that SEBI's order has prejudiced rights.
• Any modification in the order may result in further misuse by Karvy.