Telangana High Court Dismisses Karvy’s Appeal Challenging Probe By SFIO

The Telangana High Court has dismissed an appeal filed by Karvy Stock Broking Ltd., where it challenged the government’s move to initiate a probe into its affairs by the Serious Fraud Investigation Office.

The case relates to the Securities and Exchange Board of India's November order that had barred Karvy from taking on new customers and dealing with their money for allegedly unauthorised pledging of clients’ securities and using funds for its own purposes. The regulator had also restrained transfer of securities from Karvy’s depository participation account with immediate effect, except to those beneficial owners who had made full payments for the securities.

Relying upon SEBI’s investigation and certain media reports, the Registrar of Companies initiated a parallel investigation in January citing Karvy’s allegedly fraudulent activities, and called for detailed information. The government then ordered a further enquiry by the RoC and an investigation of the company’s affairs by the SFIO.

A bench comprising Justice A Rajashekher Reddy observed that the Ministry of Corporate Affairs ordered investigation of the brokerage due to the sufficient public element involved in the matter. The court dismissed Karvy’s argument that the SFIO cannot conduct an investigation in light of a concurrent enquiry by SEBI.

Reasons For Dismissal

S Niranjan Reddy, senior counsel representing Karvy, argued that the MCA failed to follow principles of natural justice as it did not grant proper time for making representations. Despite this, the ministry ordered enquiry and subsequent investigation by the SFIO. As SEBI is already investigating the matter, a further enquiry by the RoC may affect the company’s functioning, the brokerage argued.

N Rajeshwar Rao, the assistant solicitor general, countered Karvy’s submissions by arguing that:

• The RoC recommended investigation after considering Karvy’s replies and submission of a detailed report to the central government.
• The MCA framed a prima facie opinion for ordering an investigation on the basis of enough material indicating alleged fraudulent activities by the brokerage.
• And lastly, the government has followed the procedure laid down under the Companies Act.

Reading into the provisions of the law and previously decided cases, the court arrived at a conclusion that the RoC followed the guidelines prescribed by it in an interim order. The government relied upon the report given by an oversight committee to form an opinion on the investigation. And so, it dismissed Karvy’s plea challenging the legality of the process.