SEBI Bars Karvy Stock Broking From Taking New Clients
The headquarters of the Securities and Exchange Board of India in Mumbai, India. (Photographer: Adeel Halim/Bloomberg News)

SEBI Bars Karvy Stock Broking From Taking New Clients

The market regulator barred Karvy Stock Broking Ltd. from signing up new customers as a preliminary report found that it sold clients’ securities and used funds for its own purposes.

The Securities and Exchange Board of India also directed the depositories NSDL and CDSL to not act upon any instruction given by Karvy with immediate effect, according to an interim order uploaded on its website.

The regulator’s action stems from a preliminary report submitted by National Stock Exchange based on an inspection in August. The exchange found that Karvy credited funds raised by pledging client securities to six of its own bank accounts. These securities were kept in a depository participant account, which Karvy didn’t disclose it owned.

“The securities lying in the aforesaid DP account of KSBL, actually belong to the clients which are the legitimate owners of the pledged securities. Therefore, KSBL did not have any legal right to create a pledge on these securities and generate funds,” SEBI said citing the NSE report. “Even if the client securities were pledged, it should be only for meeting the obligation of the respective clients only, which was not observed in this case.”

Besides, Karvy also sold excess securities worth Rs 485 crore through nine related clients till May 31, 2019. It also transferred excess securities worth Rs 162 crore to six out of these nine related clients.

Between April 2016 and October 2019, prima facie a net amount of Rs 1,096 crore was transferred by Karvy Stock Broking to its group company Karvy Realty Pvt. Ltd., SEBI’s order said.

In the 12-page ex-parte interim order, SEBI Whole-Time Member Ananta Barua said there is a “need for urgent regulatory intervention to prevent further misuse of clients’ securities”.

The directions would be in place pending forensic audit. Karvy Stock Broking has been given 21 days from the date of receiving the order to file its objections or responses, if any.

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