On May 31, 2023, the Securities and Exchange Board of India (SEBI) cancelled the Certificate of Registration of Karvy Stock Broking Limited (KSBL/ Company). This was a major blow to the Company, one of India’s leading stockbrokers, with over 2 million clients. This article analyses SEBI’s move, the Company’s acts and the laws surrounding the same. Further, it highlights the impact of this decision on investors.

Introduction

According to SEBI’s Forensic Audit Report, 2020 (FAR) and Designated Authority Report (DAR), these are some key malpractices in which the Company engaged-

• Raising funds illegally- KSBL has been found to borrow money from banks to obtain loans against securities by pledging their client’s securities without their consent and by not following the stock lending and borrowing mechanism.  In doing this, KSBL violated two SEBI Circulars namely- Circular of 17^th April, 2018 and Circular of 20^th June, 2019 mandating stock brokers to utilise their client securities only for fulfilling the client’s margin requirements or paying their obligations for securities transactions; and that the client securities received as collateral by stock brokers must be used exclusively to meet their client’s margin requirements. Additionally, as per the second circular and as per its alignment with the Securities Contracts (Regulation) Rules, 1957, SEBI has prohibited trading members/clearing members from pledging client securities held in specific accounts for raising funds from banks/NBFCs, even with client authorisation.

• Not Settling Client’s Funds and Securities- Based on the available records, it was found that as of  22^nd November, 2019, KSBL had not returned funds amounting to Rs. 527.18 Crore and securities worth Rs. 2,862.05 Crore to their clients. By doing such an act, KSBL violated the SEBI Circular dated 3^rd December, 2009, which mandates stock brokers to settle funds and securities within 24 hours or within a time frame authorised by clients.

• Related Party Fund Transfer- Based on the FAR, it was found that KSBL significantly increased its loans from banks/NBFCs from Rs. 500.77 Crores to Rs. 2,032.67 Crores between 31^st March, 2019 and 30^th September, 2019. Out of the additional borrowings, a substantial amount was given as loans/advances/investments to KSBL’s group companies. Further analysis revealed that approximately Rs. 1,120 Crores was transferred from KSBL to its group companies from 2017 to 2019. Further, the FAR highlighted transfers from KSBL’s client bank accounts to its own bank accounts, which were subsequently transferred to the group companies. These actions were considered as a misutilization of client collaterals/securities, violating the SEBI Circular dated 18^th November, 1993.

SEBI’s Decision and Its Impact

Based on the above-mentioned observations and findings, the SEBI Chairpersons/ Members have exercised their powers under Section 12(3) read with Section 19 of the Securities And Exchange Board of India Act, 1992, and Regulation 27 of the Securities And Exchange Board of India (Intermediaries) Regulations, 2008 cancelling KSBL’s Certificate of Registration. Further, KSBL remains liable for any actions taken (or not taken) as a stockbroker and is responsible for payment of any outstanding fees and dues to SEBI.

SEBI’s move to revoke KSBL’s registration demonstrates SEBI’s firm stance against the Company’s wrongdoing and improper handling of client funds. This will promote increased responsibility and transparency in the Indian stockbroking industry. However, the immediate effect of such cancellation of a conglomerate such as KSBL is bound to disrupt trading for investors and raise concerns about fund safety.

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