NSE, BSE suspend Karvy Stock Broking's licence over non-compliance; SEBI raises estimated misuse to Rs 2,800 crore

Karvy Stock Broking’s licence has been suspended by the National Stock Exchange (NSE) with effect from today for non-compliance. The Securities and Exchange Board of India (SEBI) has banned Karvy from taking new clients over suspected illegal use of clients’ shares. The brokerage allegedly diverted the funds to its real estate arm.

NSE suspends Karvy Stock Broking's licence for non-compliance w.e.f today pic.twitter.com/tHFUDGfhJ6

— CNBC-TV18 (@CNBCTV18Live) December 2, 2019

This includes its trading in capital market, futures and options, currency derivatives, debt, MFSS and commodity derivatives segments. Investors with accounts with the brokerage will be able to migrate to other brokers, ET NOW reported. Following NSE’s action, BSE too suspended the brokerage. “Trading members of the exchange are hereby informed that pursuant to NSE Circular No.62/2019 dated December 2, 2019 informing that they have suspended Karvy Stock Broking Ltd. w.e.f. December 2, 2019 due to non-compliance of the regulatory provisions of the Exchange, BSE has deactivated trading terminals of the Trading Member, Karvy Stock Broking Ltd. (Clg. No. 917) in Equity segment & Debt segment and put them in RRM mode in Equity Derivatives, Currency Derivatives and Commodity segment w.e.f. December 2, 2019,” BSE said in a circular. [caption id=“attachment_4748931” align=“alignleft” width=“380”]  Representational image. Reuters.[/caption] The move by the exchanges follows market regulator Securities and Exchange Board of India’s (Sebi) order against KSBL for alleged misuse of client funds. The mess at Karvy seems to be much bigger than first believed, a Mint report said. SEBI estimates the misuse of client securities by the broker at Rs 2,800 crore, 40 percent more than the Rs 2,000 crore it determined earlier, two people with direct knowledge of the matter said to the newspaper. Clients in a quandary In the aftermath of Karvy Stock Broking episode, thousands of its clients allege that they are unable to regain access to their respective accounts, said a news report. Around 95,000 clients of Karvy, including retail investors, have been left in the lurch as they are yet to regain access to their shares and receive payouts from the broking firm, said a report in Mint. This happened at a time when the customers are in a position to change their broker by opening an account with a rival brokerage by obtaining a client master, the report said. However, a good number of Karvy’s clients alleged that the firm is deliberately delaying payouts and preventing them from moving to rival broking firms. In the aftermath of Karvy Stock Broking episode, capital market watchdog SEBI on Wednesday said the brokerage was indulging in activities which were “never allowed”. The comments from the regulator’s chairman Ajay Tyagi come days after SEBI banned Karvy, with immediate effect, for selling client stocks pledged with it through associated entities. Tyagi added that, in June, Sebi had made its stance explicit through a circular and hinted that there was no case for entities to indulge in such practices before that as well. “What is basically never allowed was being done. It is not that this separation was asked in June,” he told reporters on the sidelines of the Organisation for Economic Co-operation and Development (OECD)-Asian roundtable on corporate governance here. “It cannot be anyone’s case even if these instructions were not so explicit that they can use clients’ securities for doing something (of) their own,” he added. He mentioned proprietary trades or investments in other businesses while elaborating on the possible activities that a brokerage may carry out. “This is a very basic thing which can’t be allowed,” he reiterated. Last Friday, Sebi barred Karvy from taking new clients with respect to stock broking activities for alleged misuse of clients’ securities. The action followed leading bourse NSE forwarding a preliminary report to Sebi on the non-compliances observed with respect to the pledging/misuse of client securities by Karvy Stock Broking (KSBL). The exchange’s preliminary report is the result of the limited purpose inspection of KSBL conducted by it on 19 August, covering a period from 1 January onwards, Sebi had said in an order. In a 12-page ex-parte interim order, Sebi Whole Time Member Ananta Barua said there was a “need for urgent regulatory intervention to prevent further misuse of clients’ securities”. Apart from prohibiting the entity from taking new clients in respect of its stock broking activities, the watchdog directed NSDL and CDSL not to to act upon any instruction given by KSBL in pursuance of power of attorney given by its clients. “The depositories shall monitor the movement of securities into and from the DP account of clients of KSBL as DP to ensure that clients’ operations are not affected,” the order said. --With additional inputs from PTI