SEBI bans Karvy Stock Broking for defaulting client funds worth Rs. 2000 crore

Securities and Exchange Board of India (SEBI) has banned Karvy Stock Broking (KSBL) from taking new clients and executing trades after alleged client defaults worth Rs. 2000 crore. SEBI has also directed NSDL and CDSL not to act upon any instruction given by KSBL in pursuance of power of attorney given by its clients, apart from prohibiting the entity from taking new clients in respect of its stock broking activities.

According to the Order published on SEBI website, KSBL had pledged client securities. Further, KSBL credited the funds raised by pledging of client securities to six of its own bank accounts (“Stock Broker-own Account”) instead of the “Stock Broker-Client Account”.

The securities lying in the DP account of KSBL, belonged to the clients – 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. 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.

This is one of the biggest cases of broker defaults in the equity segment and despite numerous regulations, the fact remains that clients’ money and securities were brazenly misused for its own purposes by Karvy Stock Broking.

The depositories shall monitor the movement of securities into and from the Depository Participant (DP) account of clients of KSBL as DP to ensure that clients’ operations are not affected.

The SEBI website further states that KSBL has transferred securities worth off-market, from the Beneficial Owner accounts (BO accounts) of 156 clients who have not executed a single trade with them. Further, certain securities were observed to have been transferred from 291 clients who have not traded with KSBL since June 01, 2019.

Apparently, a net amount of Rs. 1096 crores has been transferred by KSBL to its group company i.e. Karvy Realty Private Limited between from 01 April 2016 to 19 October 2019.

The National Stock Exchange (NSE) has intimated that it has appointed a forensic auditor to examine in detail the cases of misuse of client funds and securities by KSBL. NSE has also requested SEBI to take appropriate and expeditious action in the matter.

Prima facie, a net amount of Rs 1,096 crore has been transferred by KSBL to its group company, i.e. Karvy Realty Private Limited, between from April 1, 2016 and October 19, 2019.

According to SEBI, it passed the order under the disciplinary proceedings against KSBL for violations of Securities Law. KSBL has given 21 days from the date of receiving the order to file objections or responses.