Stock market regulator Securities and Exchange Board of India (SEBI) has barred Karvy Stock Broking Ltd (KSBL) from taking new clients for stockbroking activities following allegations of misusing certain securities. On Friday, the National Stock Exchange (NSE) of India forwarded a preliminary report to SEBI on the non-compliances observed with respect to pledging and misuse of client securities by KSBL. The SEBI has given 21 days to KSBL to file its objections or responses if any.

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The SEBI`s preliminary report has come after inspection of KSBL conducted on August 19, covering a period from January 1 onwards.

"The acts of KSBL are prima facie in violation of Stock Broker Regulations," said SEBI`s Wholetime Member Ananta Barua in a 12-page ex-parte interim order, adding "Therefore, there is a need for urgent regulatory intervention to prevent further misuse of clients` securities."


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The order said, "KSBL is prohibited from taking new clients in respect of its stock broking activities." Besides, SEBI also directed National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) not to act upon any instruction given by KSBL in pursuance of power of attorney given by its clients.

The SEBI order said, "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."

Notably, the Maket regulator issued an ex-parte ad-interim order in investors interest recently. A routine inspection in August 2019 was carried out by SEBI, the Exchanges and the depositories. Upon submission of the preliminary inspection report by NSE to SEBI, the regulator issued an ex-parte ad-interim order dated November 22, 2019, issuing directives in investor interest.

Highlights of Karvy response on SEBI restrictions

1. The nature of this order is such that by definition, it is an ‘interim’ directive and not a final finding. The order itself states emphatically, that this is in response to preliminary findings and is subject to further review upon a more comprehensive audit and investigation.

2. The order further gives us the right to respond to each and every preliminary observation within a period of 21 days and is thus only a temporary order restraining some actions till December 16th, 2019 when we will represent our position to SEBI.

3. Order makes it clear that a temporary hold on the onboarding of new clients, and additional oversight and monitory from NSE and BSE.

4. It in no way prevents us from continuing to transact business on behalf of our existing clients as per their instructions, and in furtherance of investor best interests.

5. The restriction on onboarding new clients is only for a 21 day period subject to us submitting the clarifications and stating our position.

6. This order, which was issued on the basis of observations made by NSE during its audit, mentioned a transfer of Rs 1096 crores over a three-year period to an associate and subsidiary company of Karvy Stock Broking Ltd (KSBL)- Karvy Realty.

7. The quantum mentioned is incorrect. Karvy Realty is one of the group companies and investments were made in other subsidiary companies through this entity. We are of the firm belief that the investments made through owned funds of the group and borrowings other than the pledge of securities were fully compliant with the relevant provisions and directives of the regulator during the period that they were made.

8. All monies transferred from time to time were solely for the ongoing conduct of business in subsidiary firms and not a single penny went to enrich the promoters personal funds as is being insinuated.

9. Reports appearing in several business papers have alleged that there has been a “default of Rs 2000 crores” in the headline. This is highly misleading, completely inaccurate and damaging. Firstly, because if there is a default in our business, as stock broking is not a line of business where the term default is relevant, and the SEBI order itself neither mentions a default nor an amount of Rs 2000 crores.

10. There is NO BAN at all whatsoever, except a restriction on onboarding new customers for a twenty-one day period. This is completely false and we will continue to service all our existing customers uninterruptedly.

11. Some media has alluded to the fact that our rapid diversification in last few years has resulted in this situation. This diversification into data-driven and IT based services compliments that nature of work in our core financial services business and has been ongoing for the last fifteen years.

12. This diversification is part of a well crafted strategy endorsed by our bankers as a way of safeguarding ourselves from market volatility and our diversification has had no impact whatsoever on the broking business.

13. We will be providing a detailed explanation and clarifications to SEBI as required. There is no instance where there has been mis-utilization of client securities

14. We have a track record of resolving investor complaints, and while we acknowledge delays in handling and resolution of certain cases, to characterize it as misutilization is a travesty.

15. We acknowledge that as per prior to SEBI directives, we used to pledge shares from time to time in full compliance with the then directives as was the standard practice across broking houses, but following the issuance of fresh directives in 2018-2019, we have commenced the process of reducing the quantum.

Karvy Stock Broking crisis has scared many people who are worried about how they will recover their money from the broker. Zee Business Managing Editor Anil Singhvi, however, gave a piece of advice for market traders to lodge a complain and get their money and shares into their respective bank account and Demat account. Since the process is lengthy, they have to follow the process if they want their money back.

He said, "One can lodge a complaint against their broker in three ways — by going to the BSE or NSE website via the e-complain feature against the broker, by physically visiting 24 regional centers of the exchange or by directly visiting the SEBI website. Speaking about the time-limit for lodging one's complaint, Singhvi said that there is no time-limit but the normal practice is to put in a complaint within three years of default."

On the requisite documents that a complainant needs against broker, Singhvi said that every Demat account holder receives a contract note or trade note from the broker and it's the most important proof of one's complaint. Barring this, they can show their bank statement, arbitration form, ITR details. They can use any communications like on WhatsApp can also be attached while lodging their complaint against the broker.