The broking firm Karvy Group said that there "is no instance where there has been misutilisation of client securities", after capital markets regulator Securities & Exchange Board of India (SEBI) restricted Karvy Stock Broking Ltd from taking on new clients for numerous violations of SEBI norms including the transfer of client shares to itself and pledging of client shares to raise money for itself.
interim ex parte order issued against Karvy on Friday, the regulator also directed the two depositories – National Securities Depository Ltd (NSDL) and Central Depository Services (CDSL) from honouring instructions given by Karvy.
In response to the SEBI’s order, it said a recent routine inspection in August 2019 was carried out by SEBI, the Exchanges and the depositories.
"The nature of this order is such that by definition, it is an ‘interim’ directive and not a final finding. The order itself states emphatically, that this is in response to preliminary findings and is subject to further review upon a more comprehensive audit and investigation. The order further gives us the right to respond to each and every preliminary observation within a period of 21 days and is thus only a temporary order restraining some actions till December 16th, 2019 when we will represent our position to SEBI," it said.
The SEBI order, “in no way prevents us from continuing to transact business on behalf of our existing clients as per their instructions, and in furtherance of investor best interests,” it said.
According to the SEBI order, Karvy transferred client securities to itself and also raised money by pledging client securities and transferred this money to its own account.
A net amount of Rs 1,096 crores was transferred by Karvy Stock Broking to its group company, Karvy Realty Private Ltd. between April 1, 2016, and October 19, 2019, according to the order.
"The quantum mentioned is incorrect. Karvy Realty is one of the group companies and investments were made in other subsidiary companies through this entity. We are of the firm belief that the investments made through owned funds of the group and borrowings other than the pledge of securities were fully compliant with the relevant provisions and directives of the regulator during the period that they were made," Karvy clarified.
It acknowledged that as per prior to SEBI directives it used to pledge shares from time to time in full compliance with the then directives as was the standard practice across broking houses, but following the issuance of fresh directives in 2018-2019, it has commenced the process of reducing the quantum.
SEBI has laid stricter norms against such Proprietary trades by the brokers. In a circular issued in June, the regulator made it mandatory for brokers to transfer the pledged securities to their clients' accounts within one day of receiving the payment.
Further, in case the client defaults on the payment, brokers can hold the securities only up to five days post which they are supposed to liquidate the securities in the market and recover dues, SEBI had said.
Moreover, the regulator specified that the securities lying with the brokers for non-receipt of payment from clients cannot be used by the broker as collateral margin for any of the proprietary trades. Also, it cannot be pledged with financial institutions such as banks or NBFCs.
The brokers were supposed to release such pledges by August 2019 while the deadline was further extended to September 2019.
Further, Karvy claimed that nowhere in the SEBI order has an amount of Rs 2,000 crore been mentioned, and that this number together with the word default is extremely misleading and damaging its reputation.
“There is no ban at all whatsoever, except a restriction on on-boarding new customers for a 21 day period. This is completely false and we will continue to service all our existing customers uninterruptedly,” it said.
"There is no instance where there has been mis-utilization of client securities. We have a track record of resolving investor complaints, and while we acknowledge delays in handling and resolution of certain cases, to characterize it as misutilization is a travesty," it added.