No interim relief for Karvy as Sebi refuses permission to enrol new clients

The markets regulator has refused any modifications to its order dated November 22 against Karvy Stock Broking (Karvy), banning the firm from enrolling new clients for alleged misuse of client funds.

The Securities and Exchange Board of India (Sebi) order also highlighted the alleged misuse of power of attorney (PoA) by Karvy.

The brokerage had moved the Securities Appellate Tribunal (SAT) seeking some relief on the use of PoA on the grounds that it was causing losses to its existing clients. The tribunal had directed a Sebi whole-time member (WTM) to provide a hearing to Karvy and consider its plea of regaining PoA.

Ananta Barua, WTM, Sebi, called Karvy for a hearing on Friday and rejected the brokerage’s request, fearing further misuse.

“Forensic audit of Karvy, initiated by the NSE (National Stock Exchange), is in progress and the full magnitude (of) misutilisation of clients’ securities (will) be known upon completion (of the) forensic audit. Therefore, taking into consideration, the facts and circumstances of the case including enormity of the prima facie violations observed against Karvy in the interim order, it would not be prudent to allow use of PoA (by) Karvy,” Barua said.

The Sebi order said there are other options before Karvy’s clients for use of delivery slip instructions (DIS). “... the clients who seek to sell securities through Karvy may do so by using electronic and physical DIS only,” the order states.

In its submission, Karvy said Sebi’s interim order is impacting over 2,000 of its clients. “Karvy has 1.2 million clients, of which 300,000 are active. On an average, 20,000-25,000 clients transact on a daily basis, of which 15,000-18,000 clients are doing transactions through online trading platform. Of this, 2,000 to 2500 client transactions result into delivery,” it told the regulator.

The Sebi order highlights the alleged misuse of PoA by Karvy. The NSE’s interim report mentions that securities worth Rs 2,300 crore of more than 95,000 clients were unauthorisedly transferred.

Sebi WTM also came down heavily on the practise of not unpledging and returning of client securities beyond the deadline of October 1.