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BSE, NSE suspend Karvy's trading licence over non-compliance issue

BSE, NSE suspend Karvys trading licence over non-compliance issue

New Delhi: Leading stock exchanges BSE and NSE on Monday suspended Karvy Stock Broking Ltd's trading licence for all segments due to non-compliance of the regulatory provisions of the bourses.

In two separate circulars, the bourses announced that they "have suspended Karvy Stock Broking Ltd with effect from December 2, 2019 due to non-compliance of the regulatory provisions of the exchange".

The BSE said it has deactivated trading terminals of Karvy in equity and debt segment and put them in the risk reduction mode in equity derivatives, currency derivatives and commodity segment.

Sebi's directive had come after the National Stock Exchange forwarded a preliminary report to it on the non-compliances observed with respect to pledging/misuse of client securities by Karvy.

The exchange's preliminary report is the result of the limited purpose inspection of Karvy conducted by it on August 19, covering a period from January 1 onwards, Sebi had said in its order.

Meanwhile, markets regulator Sebi has rejected Karvy Stock Broking's plea to use its clients' power of attorney (PoA) to settle trades done by them and said securities worth Rs 2,300 crore of more than 95,000 clients were illegally transferred by the broker.

After considering the facts and circumstances of the case including enormity of the prima facie violations observed against Karvy, Sebi in an order passed late night Friday said it would not be prudent to allow the use of PoA by Karvy given to it by its clients.

The markets watchdog further said clients of Karvy who seek to sell securities through the broker may do so by using electronic or physical Delivery Instruction Slip (DIS) only.

A DIS is used by sellers of securities to instruct their depository participant to debit their demat account.

The order also highlighted that Karvy, in one demat account under its name on the BSE, unauthorisedly transferred securities worth Rs 2,300 crore of more than 95,000 clients, into this account, by misusing the PoA given by its clients. This demat account was never disclosed by the firm in its filing with stock exchanges.

The securities of fully paid clients were also pledged by Karvy Stock Broking Ltd (KSBL) to generate funds for its own/group entities use.

Apart from misutilisation of client funds, KSBL continued to create additional pledges on client securities even after Sebi regulations prohibiting firms from doing so became effective from October 1.

Sebi said forensic audit of KSBL, initiated by National Stock Exchange (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".

The latest order comes after the Securities Appellate Tribunal (SAT) on Friday directed Sebi to look into the issue of clarification sought by KSBL with regard to usage of PoA given by clients. The tribunal had asked the regulator to pass an appropriate order after giving an opportunity of hearing by December 2, 2019.

Prior to that, KSBL had also written to Sebi requesting it to permit the continuation of KSBL using the PoA only for the limited purpose of transfer of securities to the pool account solely for settling the clients' pay-in obligations to stock exchanges.

Sebi, through an order passed on November 22, had barred KSBL from taking new clients in respect of its stock broking activities and also prevented it from using the PoA given by clients after the broker was found to have allegedly misused clients' securities.

The order was a result of a preliminary report forwarded by the NSE on the non-compliances observed with respect to pledging/misuse of client securities by Karvy.

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