Sebi bans Karvy Stock Broking, promoter from securities market

New Delhi: Sebi on Friday barred Karvy Stock Broking Ltd (KSBL) and its promoter Comandur Parthasarathy from the securities market for seven years and imposed a penalty of Rs 21 crore on them for misappropriating clients' funds by misusing the Power of Attorney given to it.

Further, the funds raised by pledging clients' securities were siphoned off by KSBL to its group firms -- Karvy Realty (India) Ltd and Karvy Capital Ltd, the Securities and Exchange Board of India (Sebi) said in its final order.

Apart from market ban, the regulator has slapped a fine of Rs 13 crore on KSBL and Rs 8 crore on Parthasarathy, promoter-cum-managing director.

While Parthasarathy has been restrained from holding the post of director, or any key managerial position in any listed public company and associating with any registered intermediary for 10 years, the same for KSBL's then directors -- Bhagwan Das Narang, Jyothi Prasad -- is two years.

Also, the regulator levied a fine of Rs 5 lakh each on the two then directors. The fine needs to be paid within 45 days.

The regulator has directed Karvy Realty and Karvy Capital to return Rs 1,442.95 crore transferred to them by the brokerage house. They have been asked to return the funds to KSBL within three months, failing which NSE will take control of assets of the two firms to recover the money.

In addition, KSBL, Parthasarathy, Karvy Realty and Karvy Capital have been directed to cooperate with the NSE in refund of funds and securities of the clients of KSBL.

In its 88-page order, the regulator found that KSBL was raising funds by pledging clients' securities and by misusing the Power of Attorney (PoA) granted to it by its clients. Further, the funds by KSBL were being diverted to its group entities thereby violating various provisions of law.

KSBL had sold excess securities (securities not available in DP account) to the tune of Rs 485 crore through 9 related entities, which were also its clients, till May 2019. Further, KSBL had also transferred excess securities to 6 out of these 9 related entities.

Going by the order, the overall borrowing of KSBL, which was raising loans from financial institutions by pledging shares of its clients as collateral, was Rs 2,032.67 crore by September 2019 and the value of securities pledge by the stock broker was Rs 2,700 crore during the period.

Misappropriation of funds

The case relates to KSBL's massive asset mobilisation drive followed by raising of huge funds from financial institutions by using the securities mobilised from the clients with a promise to pay them interest. These funds were misappropriated and diverted to KSBL's connected entities, thereby defaulting in its obligations to settle the securities and funds with the clients as per regulatory instructions.

"It has been adequately exposed by EY in its forensic audit that every day the treasury team of KSBL used to calculate the requirement of funds for its operations in the light of the quantum of trades undertaken during the day.

"The said calculation used to be forwarded to operation team, which further used to randomly select securities lying in different clients' accounts for placing them under pledge with financial institutions to raise funds through LAS (Loan Against Securities) facility so as to meet the funds requirement," Sebi noted.

In November 2019, the watchdog, through its interim order, barred KSBL from taking new brokerage clients after it was found that the firm had allegedly misused clients' securities to the tune of over Rs 2,000 crore.

The exchange's preliminary report was the result of the limited purpose inspection of KSBL conducted by it on August 19, 2019, covering the period from January 1, 2019 onwards.

The interim order came after NSE forwarded a preliminary report to Sebi on non-compliances observed with respect to pledging or misuse of clients' securities by KSBL. Finally, the directions issued through the interim order were confirmed by Sebi in November 2020.

In the meantime, NSE had appointed Ernst and Young LLP (EY) as a forensic auditor to conduct forensic audit into the shortfall of funds and securities during joint inspection conducted by Sebi, exchanges -- NSE and BSE -- and depositories -- NSDL and CDSL. It was to identify the extent of misuse of funds and securities as well as other violations committed by it and also to identify the role of management and directors of KSBL in the said wrongdoings.