SEBI
Order in the matter of Karvy Stock
Broking Ltd Full Details
WTM/AB/SEBI/MIRSD/HO/36/2019
SECURITIES AND EXCHANGE BOARD OF INDIA
CORAM: ANANTA BARUA, WHOLE TIME MEMBER
ORDER
UNDER SECTIONS 11(1), 11(4) AND 11B OF THE SECURITIES AND
EXCHANGE BOARD OF INDIA ACT, 1992 READ WITH REGULATION 35 OF SECURITIES AND
EXCHANGE BOARD OF INDIA (INTERMEDIARIES) REGULATIONS, 2008.
In the matter of ex parte ad interim order dated
November 22, 2019 passed in respect of Karvy Stock Broking Limited (PAN:
AABCK5190K)
1. Securities and Exchange Board of India (hereinafter
referred to as “SEBI”) passed an ex parte ad interim order dated
November 22, 2019 (hereinafter referred to as “interim order”) against Karvy
Stock Broking Limited (hereinafter referred to as “KSBL”/“Stock
Broker”/“Noticee”) wherein inter alia following directions
were issued:
(i) KSBL is prohibited
from taking new clients in respect of its stock broking activities;
(ii) The Depositories i.e. NSDL and CDSL, in order to prevent
further misuse of clients’ securities by KSBL, are hereby directed not to act
upon any instruction given by KSBL in pursuance of power of attorney given to
KSBL by its clients, with immediate effect;
(iii) The Depositories shall monitor the movement of
securities into and from the DP account of clients of KSBL as DP to ensure that
clients’ operations are not affected;
Order in the matter of Karvy Stock Broking Limited
(iv) The Depositories
shall not allow transfer of securities from DP account no. 11458979, named
KARVY STOCK BROKING LTD (BSE) with immediate effect. The transfer of securities
from DP account no. 11458979, named KARVY STOCK BROKING LTD (BSE) shall be
permitted only to the respective beneficial owner who has paid in full against
these securities, under supervision of NSE; and
(v) The Depositories and Stock Exchanges shall initiate
appropriate disciplinary regulatory proceedings against the Noticee for misuse
of clients’ funds and securities as per their respective bye laws, rules and
regulations;………….”
2. KSBL sent letters dated November 24, 2019, November 25,
2019 and November 26, 2019 primarily requesting SEBI to permit the continuation
of KSBL using the power of attorney (PoA) only for the limited purpose of
transfer of securities to the pool account solely for settling the clients'
pay-in obligations to the Stock Exchanges.
3. On November 28, 2019, KSBL filed an Appeal no. 579 of 2019
before Hon’ble Securities Appellate Tribunal, Mumbai (hereinafter referred to
as “Hon’ble SAT”) inter alia praying as follows:
(a) the Hon’ble Tribunal be
pleased to direct the Respondent to allow the Appellant to use the Power of
Attorney given by clients for limited purpose of transfer of securities to the
pool account from demat accounts for settling clients’ pay-in obligations to
the exchanges;
(b) pending the hearing and
final disposal of this Appeal, this Hon’ble Tribunal be pleased to stay the
operation and effect of relevant direction in the para no. 21 of the Impugned
Order passed by the Respondent;
(c) in the alternative
direct the Respondent to consider the request made by the Appellant through its
letters dated 24.11.2019, 25.11.2019 & 26.11.2019
(d) ………………”
Order in the matter of Karvy Stock Broking Limited
4. Hon’ble SAT vide order dated November 29, 2019 disposed of
the appeal inter alia directing as under:
7. We accordingly dispose of this appeal at this stage with a
direction to the WTM to consider the request of the appellant which has been
made vide letters dated November 24, 25 and 26, 2019 and pass an appropriate
order after giving an opportunity of hearing by December 02, 2019………..”
5. Accordingly, vide an email dated November 29, 2019, KSBL
was called for hearing on the same day at 2:00 pm. During hearing, KSBL was
represented by its advocates and Mr. C. H. Vishwanath, VP- Compliance of KSBL
and following submissions were made on behalf of KSBL:
(i) KSBL has 12 lacs clients, out of which 3 lacs clients are
active clients. On an average 20,000-25,000 clients transact on daily basis,
out of which 15,000-18,000 clients are doing transactions through online trading
platform. Out of this, 2000 to 2500 client transactions result into delivery.
KSBL has 900 offices (including franchise) across India.
(ii) The interim order only prohibits KSBL from taking new
clients meaning thereby that it has been allowed to service its existing
clients.
(iii) On one hand, vide directions in para 21(ii) of the
interim order directs the Depositories not to act upon the instructions given
by KSBL in pursuance of the PoA of the clients which has resulted into KSBL’s
inability to execute the instructions of the client on the basis of PoA and not
able to transfer the securities in the pool account for settlement of the
clients obligations. However, on the other hand in para 21(iii) of the interim
order, the directions are given to the Depositories to monitor the movement of
securities to ensure that the client operations are not affected.
(iv) KSBL in accordance with the direction at para 21 (i) of
the interim order has only been restricted from accepting new clients, however,
it is still obliged to service its existing clients. The direction at para 21
(ii) of the interim order is a qualified direction and not a blanket restriction, as is being interpreted
by the Depositories. Thus, if the directions at para 21(i), 21 (ii) and 21
(iii) of the interim order are to be read in harmony, the Depositories have
been directed not to act upon any instructions in pursuance of the PoA, only to
the extent of preventing further misuse of client securities. The direction at
para 21 (ii) is not meant to restrict the use of PoA by KSBL to meet the daily
pay-in obligations of those clients whose securities have not been alleged
misused. By imposing a complete embargo on use of PoA, the Depositories have
misinterpreted the spirit of the directions contained in the interim order and
which in turn has resulted into tremendous hardship and losses for the clients
of KSBL.
(v) Since, none of the PoA's of clients’ are being acted upon
by the Depositories, KSBL is unable to transfer the clients’ securities from
clients’ demat account to KSBL’s pool demat account, which is resulting in
delivery failure and consequent delivery of securities through auction
mechanism, thus incurring huge loss for the clients.
(vi) KSBL is ready to furnish suitable undertaking so as to
ensure that the permitting use of PoA will not be misused by it.
(vii) Accordingly, KSBL has prayed for permitting it to use
PoA for its existing clients.
6. I have considered the representations and aforesaid
submissions made during the hearing. The interim order in the matter was passed
by SEBI when it was prima facie found that the KSBL has misused the
clients’ securities by misusing the PoA given to it by its clients. Thus,
direction given in para 21(ii) of the interim order restricts the use of PoA by
KSBL.
7. The KSBL is now praying for removal of restriction on the
use of PoA. I note that the clients of stock brokers are free to avail various modes
for giving instructions to the brokers including through PoA. Giving
instructions through PoA is not mandatory, in terms of SEBI Circular no.
CIR/MRD/DMS/13/2010 dated April 23, 2010. Master Circular on Delivery
Instruction Slip (DIS) of NSDL-Depository, provide detailed framework for
instructions for delivery of securities such as instruction received from
illiterate persons/from blind persons/though fax,
SPEED-e facility, etc. As per the Business Rules of
depositories, the mode of affecting transfer by book entry based on electronic
instruction received from the client such as through Speed e facility
eliminating the need to deliver the DIS in physical form. If any client seeks
to give instruction in physical form, he may also do so by sending the DIS
through fax to depository participant and original DIS may be sent within three
days of the fax. The client who seeks to send physical DIS, in addition to
sending it by fax has option to deliver the same at the offices of the broker
of depository participant (DP).
8. As noted in detail in the interim order, SEBI Circular No.
CIR/HO/MIRSD/DOP/CIR/P/2019 dated June 20, 2019 provides that the client’s
securities already pledged shall, by August 31, 2019 (later extended to
September 30, 2019), be either unpledged and returned to the clients upon
fulfilment of pay-in obligation or disposed of after giving notice of 5 days to
the client. The said circular also provided that clients’ securities lying with
a stock broker shall not be permitted to be pledged/transferred for raising
funds by the stock broker. Also in terms of the said circular, all TM and/or CM
are required to transfer the clients’ securities received in pay-out to clients
demat account within one working day. In case the client does not pay for such
securities received in pay-out, then the TM/CM shall be entitled to retain
those securities up to five trading days after pay-out. Further, where the
client fails to meet its funds pay-in obligation within five trading days from
payout day, the TM/CM shall liquidate the securities in the market to recover
its dues. Under no circumstances, the securities of the clients received in
pay-out, can be retained by the TM/CM beyond five trading days and/or can be
used for any other purpose.
9. Thus, from October 01, 2019, TM/CM were obliged to
unpledge all the securities pledged by them and were prohibited from creating
any new pledge on clients’ securities. Any pledge created or continued on clients’
securities after October 01, 2019 is in violation of the said circular. The
interim order refers to the interim report given by NSE wherein it has been
mentioned that in one demat account no. 11458979, named KARVY STOCK BROKING LTD
(BSE) which was never disclosed by KSBL in its filing with stock exchanges, the
securities worth Rs. 2300 crore (approx.) of more than 95,000 clients, were
unauthorizedly transferred into this account by KSBL, by misusing the PoA given
by its clients. The securities of fully paid clients were also pledged by KSBL
to generate funds for its own/group entities use. The outstanding pledge, if
any, was to be unpledged by September 30, 2019 as required under Circular dated
June 20, 2019 which was not complied with by KSBL. Forensic audit of the KSBL,
institiated by NSE, is in progress and the full magnitude of the mis-utilisation
of the clients’ securities will be known after completion of the forensic
audit. Therefore, taking into consideration, the facts and circumstances of the
case including enormity of the prima facie violations observed against
the KSBL in the interim order, it would not be prudent to allow the use of PoA
by KSBL given to it by its clients, as prayed by KSBL. Thus, the clients of
KSBL who seek to sell securities through KSBL may do so by using electronic or
physical DIS only. Accordingly, representations dated November 24, 25 and 26,
2019 made by KSBL stands disposed of, on the aforesaid lines.
10. This order shall come into force with immediate effect. A
copy of this order shall be forwarded to KSBL, Stock Exchanges and Depositories
to ensure that the directions given above are strictly complied with.
Place:
Mumbai
|
Sd/-
ANANTA
BARUA
|
Date:
November 29, 2019
|
WHOLE
TIME MEMBER
SECURITIES
AND EXCHANGE BOARD OF INDIA
|
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