Ajay Tyagi, chairman, Securities and Exchange Board of India (Sebi), on Wednesday denounced the practices followed by Karvy Stock Broking.
“More than governance, what was never allowed was being done,” he said on the sidelines of the OECD-Asian Corporate Governance Roundtable. “It is not that separation (of client accounts) was asked in June. It isn’t anyone’s case to use client securities for investing in other businesses. It can’t be allowed.”
Sebi on Friday had issued an ex-parte interim order against Karvy for misusing client funds. The brokerage has allegedly pledged the securities of its clients to raise funds to invest in other business, such as real estate and to carry out proprietary trading. The market regulator issued ex-parte orders — passed without giving a hearing opportunity to the alleged wrongdoer — in extreme cases to protect the integrity of the markets and safeguard investors. The market regulator has given Karvy 21 days to respond to the allegations. Tyagi refused to comment on whether more brokerages are under the scanner for misuse of client funds.
Through a circular in June, Sebi had directed brokers not to unpledge and return all clients funds. The regulator had reiterated that such practice was not allowed. Earlier, it was a fairly common practice among brokers to use their client securities as collateral another client trades or for proprietary trading. This was possible as brokers enjoyed the power of attorney over their client securities.
In his speech, Tyagi expressed concerns over the independence of independent directors, particularly in promoter-dominated companies. “While such directors meet the regulatory requirements on paper, their independence in conduct and decisions is often under the cloud,” he said.
He said the minority investors’ interest needs to be protected in areas such as related party transactions (RPTs).
“Use of complicated group structures and complex RPTs increase the concern of siphoning of funds, money laundering, and round-tripping,” the Sebi chief said, adding that the market regulator was looking to improving the existing norms on RPTs.
Tyagi said there needs to be a balance of power between promoters and minority shareholders.
“While the majority of shareholders should not abuse their position, the minority shareholders should also not misuse the special powers granted to them under specific provisions. In practice, it is quite difficult to keep this balance,” he said.