The Securities and Exchange Board of India (SEBI) has banned Karvy Stock Broking Ltd (KSBL) with immediate effect, to take any new clients or execute trades of existing clients. The ban comes after client defaults worth Rs 2,000 crore.
An NSE investigation revealed that Karvy had allegedly sold client stocks pledged with it through associated entities.
SEBI said the firm had misused client collateral for its own trades. As per the regulator's intermediary regulations, brokerage firms cannot create additional pledges on clients' securities and generate funds, which Karvy did to the extent of Rs 2,000 crore.
A forensic audit has been initiated by SEBI to establish the extent of alleged misuse of client pledges, and it has directed exchanges and depositories to initiate disciplinary proceedings against the brokerage firm.
The regulator has ordered depositories not to act upon any instructions by Karvy Stock Broking on the basis of powers of attorney given to the brokerage house, to prevent further misuse of client securities.
However, to ensure smooth operations for a large number of clients that Karvy has, SEBI has asked depositories to monitor the flow of money from clients' accounts.
SEBI has raised suspicion on Karvy's conduct. "Considering the issue of misuse of clients' securities by Karvy Stock Broking in unauthorised manner, for its own use and purposely not disclosing the DP account no. 11458979, named Karvy Stock Broking Ltd (BSE) to the exchanges in their reporting create a serious doubt on the conduct and integrity of Karvy Stock Broking Ltd," it said.