SEBI bans Karvy Stock Broking from primary market activities for a year

Indian securities market regulator, SEBI, on Monday barred Karvy Stock Broking Ltd from undertaking new primary market assignments for a period of one year.

In its order, the Securities and Exchange Board of India (SEBI) directed Karvy Stock Broking not to undertake new primary market assignment including acting as syndicate member or providing syndication services (procuring initial public offer (IPO) applications and bidding in IPOs), directly or indirectly, in IPOs for a period of one year.

"In order to avoid inconvenience to any issuer/intermediary, it is clarified that this direction shall not hinder the activities for which the noticee was already engaged for undertaking primary market activities before the date of this order," it said.

The market's regulator had in March 2014 barred Karvy Stock Broking from taking up new customers/clients for a period of six months in respect of its business as a stock broker.

On an appeal with the Securities Appellate Tribunal (SAT) by the stock broker, the SAT ordered SEBI to pass a fresh order after giving an opportunity to Karvy Stock Broking to cross examine Devi Dutt, a manager at Bharat Overseas Bank Ltd's Ahmedabad branch.

The regulator agreed with the submissions made by Karvy Stock Broking that the violations were related to primary market activities and not secondary market activity, namely, stock broking.

"The introduction of bank accounts and bidding of IPO applications are indeed not secondary market Page 39 of 39 activities. Keeping in view the fact that allegations emanate from IPO irregularities which is a primary market activity and not from any market manipulation (volume/price manipulation while trading in a stock exchange), I tend to appreciate the argument of the notice," SEBI's whole time member Prashant Saran said in his order.

In an investigation into the irregularities in the IPO by 21 companies between 2003-2005, SEBI found many individuals/entities or key operators had opened various demat accounts in fictitious/benami names and made large number of applications in the IPOs in the category of retail investors (each of the applications being of small value as to make it eligible for allotment under the retail category). These key operators cornered/acquired the shares issued in the IPOs by using these fictitious accounts.

On allotment of shares under the retail category, the same were transferred to the demat accounts of the key operators who subsequently transferred the shares in off-market to ultimate beneficiaries who were the financiers in the IPOs.

"The investigations prima facie observed that the 'Karvy Group' comprising of - Karvy Stock Broking Limited (KSBL), Karvy Consultants Limited (KCL), Karvy Computershare Private Limited (KCPL), Karvy Securities Limited (KSL) and Karvy Investor Services Limited (KISL), had allegedly assisted, aided and abetted the key operators in cornering the shares issued in the IPOs," the order said giving a brief background of the case.