SEBI Bans Karvy Stock Broking, Promoter From Securities Market For 7-Yrs; Fines Rs 21cr Penalty

The securities and exchnage board of India (SEBI) bans a renowned brokerage firm, Karvy Stock Broking Ltd (KSBL) and its Comandur Parthasarathy from the securities market for seven years. The regulatory body also imposed a penalty of Rs 21 crore for misappropriating clients' funds by misusing the Power of Attorney given to it.

In its final order passed on Friday, SEBI said that the funds raised by pledging clients' securities were siphoned off by KSBL to its group firms -- Karvy Realty (India) Ltd and Karvy Capital Ltd.

The regulator has ordered Karvy Realty and Karvy Capital to return Rs 1,442.95 crore transferred to them by the KSBL. They have been asked to return the funds to the brokergae within a period of three months, and if failed to do so, the NSE will take control of assets of the two firms to recover the money.

In addition, KSBL, Parthasarathy, Karvy Realty and Karvy Capital have been directed to cooperate with the NSE in refund of funds and securities of the clients of KSBL. Plus a fine of Rs 5 lakh each is levied on the two then directors, which needs to be paid within 45 days.

In its 88-page order, the regulator found that KSBL was raising funds by pledging clients' securities and by misusing the Power of Attorney (PoA) granted to it by its clients. Further, the funds by KSBL were being diverted to its group entities thereby violating various provisions of law.

SEBI also noticed that KSBL had sold excess securities (securities not available in DP account) to the tune of Rs 485 crore through 9 related entities, that remained till May 2019. Further, KSBL had also transferred excess securities to 6 out of these 9 related entities.

Going by the order, KSBL was raising loans from financial institutions by pledging shares of its clients as collateral. The overall borrowing was of Rs 2,032.67 crore by September 2019 and the value of securities pledge by the stock broker was Rs 2,700 crore during the period.

The case is linked to KSBL's massive asset mobilisation drive followed by raising of huge funds from financial institutions. The company was using funds through the securities mobilised from the clients with a promise to pay them interest. These funds were misappropriated and diverted to KSBL's connected entities, thereby defaulting in its obligations to settle the securities and funds with the clients as per regulatory instructions.

''It has been adequately exposed by EY in its forensic audit that every day the treasury team of KSBL used to calculate the requirement of funds for its operations in the light of the quantum of trades undertaken during the day.

''The said calculation used to be forwarded to operation team, which further used to randomly select securities lying in different clients' accounts for placing them under pledge with financial institutions to raise funds through LAS (Loan Against Securities) facility so as to meet the funds requirement,'' Sebi noted.

In November 2019, the watchdog, through its interim order, barred KSBL from taking new brokerage clients after it was found that the firm had allegedly misused clients' securities to the tune of over Rs 2,000 crore.

The exchange's preliminary report was the result of the limited purpose inspection of KSBL conducted by it on August 19, 2019, covering the period from January 1, 2019 onwards.

The interim order came after NSE forwarded a preliminary report to Sebi on non-compliances observed with respect to pledging or misuse of clients' securities by KSBL. Finally, the directions issued through the interim order were confirmed by Sebi in November 2020.

In the meantime, NSE had appointed Ernst and Young LLP (EY) as a forensic auditor to conduct forensic audit into the shortfall of funds and securities during joint inspection conducted by Sebi, exchanges -- NSE and BSE -- and depositories -- NSDL and CDSL. It was to identify the extent of misuse of funds and securities as well as other violations committed by it and also to identify the role of management and directors of KSBL in the said wrongdoings.