The words come from none other than Ajay Tyagi, the Chairman at the watchdog. The chairman made his observations at the sidelines of the Economic co-operation and Development (OECD)'s Asia Roundtable organised in the city. A PTI report detailes the comments from the Chairman made barely days after SEBI banned Karvy for selling client stocks pledged with it through associated entities.
Tyagi explained that SEBI had made its stance "explicit" in June through a circular but added that there was no case for entities to indulge in such practices prior to the notification. He said, "What is basically never allowed was being done. It is not that this separation was asked in June."
He added, "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 mentioned proprietary trades or investments in other businesses while elaborating on the possible activities that a brokerage may carry out. He emphasized, "This is a very basic thing which can't be allowed."
SEBI's ban on Karvy Stock Broking Ltd (KSBL) follows the National Stock Exchange's preliminary report on non-compliance with respect to pledging/misuse of client securities.SEBI's detailed order suggests that the NSE based its observation on the basis of a limited purpose inspection of Karvy Stock Broking conducted on 19 August, covering a period from 1 January onwards.
The 12 page ex-parte interim order had SEBI's Whole Time Member Ananta Barua saying there was a "need for urgent regulatory intervention to prevent further misuse of clients' securities".
The top 5 observations made by the market watchdog in its order are:
• Considering the issue of misuse of clients' securities by KSBL in an 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 KSBL.
• Detecting the fraud, the order noted that the securities lying in the aforesaid DP account actually belong to the clients who are the legitimate owners of the securities. Therefore, KSBL did not have any legal right to create any kind of pledge on these securities.
• KSBL has sold excess securities (securities not available in DP account) to the tune of Rs 485 crore through nine related clients till May 31, 2019. Further, KSBL has also transferred excess securities to six out of these nine related clients to the tune of Rs 162 crore till May 31, 2019.
• On subsequent verification, it was observed that securities worth Rs 257.08 crore, pledged on behalf of four clients out of the aforesaid nine clients, were unpledged between June 1, 2019 and August 22, 2019 and securities worth of Rs 217.85 crore was recovered by KSBL from four out of the nine client accounts.
• Prima facie, a net amount of Rs 1,096 crore has been transferred by KSBL to its group company, i.e. Karvy Realty Private Limited, between from April 1, 2016 and October 19, 2019.
The watchdog directed that pending forensic audit, KSBL was restricted from taking in any new clients with respect to stock broking activities. The defaults estimated to the tune of Rs 2,000 crore makes KSBL the biggest cases of broker default in the equity segment.
Besides prohibiting Karvy from taking any new clients, SEBI has also directed NSDL (National Securities Depository Ltd) and CDSL (Central Depository Services Ltd) not to to act upon instructions from KSBL in pursuance of power of attorney given by its clients. The 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."
Karvy Stock Broking replied to initial media reports on liquidity crunch saying that there were few "bad-trades" in its commodities trade - castor seeds. The brokerage house back then said. "These (issue) pertain to a few customers, from which the total amount that is now collectible is around Rs 5 crore. The amount involved, given the size of Karvy, is small."
With agency inputs.