Misuse of client funds: SAT asks Sebi to review order issued against Karvy

The Sebi counsel informed the tribunal about the forensic audit initiated against the brokerage


The Securities Appellate Tribunal (SAT) on Friday directed markets regulator the Securities and Exchange Board of India (Sebi) to review the ex parte ad interim order issued against Karvy Stock Broking (KSBL) for alleged misuse of client securities.
The brokerage had moved the tribunal seeking limited modifications to the Sebi order.

“Since a clarification has been sought by the appellant we deem it fit and proper that the WTM (whole-time member) should look into this aspect and pass appropriate order after giving an opportunity of hearing to the appellant,” said SAT in an order.
Following the Sebi order on November 22, Karvy had written letters to Sebi on November 23, 24 and 25 seeking clarity on some strictures issued by the regulator.

Sebi's WTM has been directed to pass an appropriate order by Monday after giving an opportunity of hearing to KSBL.

Karvy’s counsel told the tribunal that Sebi didn’t respond to any of the letters. The counsel added that the Sebi directions have caused a loss of Rs 8 crore to its clients and their interest needs to be safeguarded.

Barring Karvy from taking up new clients, Sebi has issued several other directions. These include directing the depositories to not act upon any instruction given by Karvy in pursuance of power of attorney given to the brokerage by its clients.

This has created hurdles for the brokerage, as it now has to make use of delivery instruction slips, which are signed by clients for trading. The brokerage has also made a representation to the National Stock Exchange (NSE) over this issue.

Karvy’s counsel told SAT that the brokerages existing clients are facing difficulties because of the directions issued by Sebi.

The Sebi counsel informed the tribunal about the forensic audit initiated against the brokerage.

The counsel also expressed reservations is allowing KSBL’s prayer stating it could “lead to further misuse of the power of attorney given to them by their clients.”

SAT ruled that while the audit can go on, Sebi should ensure that existing clients don’t suffer.

Based on the directions of Sebi, the National Stock Exchange (NSE) has directed EY to conduct a forensic audit on the broking firm. The audit will help establish the extent of misuse of client securities and fund diversion, if any, carried out by the brokerage.

Sebi’s order against Karvy alleges unauthorised use of client accounts.

“The securities lying in the DP account of KSBL actually belong to the clients who are the legitimate owners of the pledged securities. Therefore, KSBL did not have any legal right to create a pledge on these securities and generate funds. Even if the client securities were pledged, it should only have been for meeting the obligation of respective clients only, which was not observed in this case,” the order stated.