SEBI Chief Slams Karvy Practices; Hints At Plans To Tighten Related Party Transactions Norms Used To Siphon Off Funds

Securities & Exchange Board of India (SEBI) Chairman Ajay Tyagi has criticized the practices followed by Karvy Stock Broking and stated that the capital market regulator is looking at improving or tightening existing norms on related party transactions (RPTs).

Tyagi stated that complex RPTs and complicated group structures have increased the concern of siphoning off funds, money laundering and round tripping.

He stated that Karvy Stock Broking had done what was never allowed and that client securities cannot be permitted to be invested in other businesses, on the sidelines of the OECD-Asian Corporate Governance Roundtable.

Ajay Tyagi, chairman, Securities and Exchange Board of India (Sebi), on Wednesday denounced the practices followed by Karvy Stock Broking.

Tyagi expressed concerns over the independence of independent directors, particularly in promoter-dominated companies. He stated that while independent directors meet regulatory requirements on paper, their independence in conduct as well as decisions is often under a cloud.

He stated that there needs to be a balance of power between promoters and minority shareholders.

He stated that while majority shareholders should not abuse their position, minority shareholders too should not misuse special powers granted to them under specific provisions, adding that in practice, it is quite difficult to keep this balance.

Incidentally, it may be recalled that recently the SEBI had issued an ex-parte interim order against Karvy for misusing client funds, after it was given 21 days to respond to the allegations.

The brokerage allegedly pledged the securities of its clients to raise funds to invest in other business, like real estate and to carry out proprietary trading.

In June, the SEBI had issued a circular which had directed brokers not to unpledge and return all clients funds, reiterating that such a practice was not allowed.

Earlier, it used to be a fairly common practice among brokers to use their client securities as collateral for another client’s trades or for proprietary trading. This was possible because brokers enjoyed power of attorney over their client securities.