Sebi Clears Karvy Capital and Officials of Alleged AIF Rule Violations After Review

The Securities and Exchange Board of India (Sebi) has concluded its investigation into Karvy Capital Ltd and its key management, finding no breaches of alternative investment fund (AIF) regulations. This decision follows a detailed examination of Karvy Capital Alternative Investment Trust and KCAP Alternative Investment Fund to determine if they met the required standards for AIFs registered with Sebi.

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Sebi had previously identified some non-compliance issues, prompting adjudication proceedings against Karvy Capital Ltd (KCL) and key figures like Ajit Bhaskaran, Hitungshu Debnath, and K P Jeewan. Consequently, a show cause notice was issued to these individuals on June 7, 2024, regarding alleged AIF rule violations.

Karvy Stock Broking Ltd's Influence

The case primarily involved Karvy Stock Broking Ltd (KSBL), the parent company of Karvy Capital, which owns nearly all shares in the fund manager. KSBL had been deemed unfit for the securities market due to several regulatory breaches, including a 2023 order barring it from market access for seven years.

Despite Sebi's directive for KSBL to divest its stake in Karvy Capital within six months of disqualification, legal hurdles prevented this. These included attachment orders by the Enforcement Directorate, restrictions from the National Company Law Tribunal (NCLT), and KSBL's lack of an operational board.

Karvy Capital's Defence

Karvy Capital argued that neither of its AIFs had raised funds or engaged active investors. The firm also highlighted measures taken to address concerns, such as surrendering AIF licences. Sebi acknowledged the firm's adherence to disclosure requirements and its transparency about potential promoter-related issues under fit-and-proper norms.

Sebi's adjudicating officer, Amar Navlani, stated, "I find that for the allegation that noticees had failed to ensure that Karvy Capital alternative investment trust and KCAP alternative investment fund were in compliance with AIF regulations." He further noted that allegations regarding violations of the AIFs' Code of Conduct were not substantiated.

Conclusion of Proceedings

Sebi concluded that neither Karvy Capital nor its management violated market rules due to circumstances beyond their control. As a result, the show cause notice issued on June 7, 2024, was dismissed without any financial penalties imposed on the noticees.