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Karvy Broking gets interim relief

Karvy Broking gets interim relief

Rachna Monga

An appellate body that hears appeals against the orders of the capital market regulator, has issued a stay on a three-month ban imposed on Karvy Stock Broking.

However, a stay order by the tribunal, the Securities Appellate Tribunal (SAT), doesn’t necessarily imply that the judgement of the regulator, Securities and Exchange Board of India (Sebi), has been set aside.

The tribunal is yet to hear arguments from both parties.

In a 22 June order, Sebi banned the broking house from undertaking any stock broking activity for three months. It also prohibited the company from opening new demat accounts till December, a ban in force since it came out with the first investigation report in April 2006. The prohibition on opening of new demat account, however, continues.

See: Chronology of Karvy’s troubles

The SAT order stated, “It is found that Karvy group entities were ubiquitously present in the entire gamut of the initial public offer (IPO) process running from introducing bank accounts, opening of dematerialized accounts, arranging IPO finance, bidding of applications, making allotment, issuing refund, making off-market transfers and sale of IPO shares on the stock exchanges."

The latest SAT order continues the trend of the appellate body granting stays on the regulator’s decisions in relation to the IPO scam.

Last week, the tribunal had granted a stay on the Sebi order that imposed a penalty of Rs8 crore on the two depositaries—the National Securities Depositories Ltd and the Central Depository Services Ltd.

It was for the third time that NSDL, the largest national depositary, had appealed to the tribunal in the IPO-related investigations.

These orders against the depositaries and Karvy were in connection with the Sebi’s investigations that began in December 2005.

The regulator had found that in some 21 IPOs floated during 2003 and 2005, thousands of duplicate and multiple demat accounts were used to garner shares under the retail quota of each IPO.

Typically, these IPOs had allocated 30% of their offerings to retail investors.

In a 252-page order delivered in April 2006, Sebi banned 85 individuals and entities from investing in IPOs and barred 12 depository participants (DPs) from opening demat accounts. Karvy was one of the depositories banned. Karvy Computershare, its share registry arm, was also banned from undertaking any fresh business of doing paperwork of IPO. It was allowed to undertake fresh business in February.

As Sebi investigated further, the DPs including HDFC Bank Ltd, Anagram Stock Broking, Centurion Bank of Punjab, Motilal Oswal were allowed to open fresh demat accounts in phases. However, the ban on Karvy as a DP continued. Sebi had, last year, also prohibited the broking outfit for carrying out any proprietary trading in the stock market.

Finally, on 22 June, the company was banned from undertaking business on behalf of its clients also as Sebi prohibited it from undertaking any kind of broking business.

Karvy’s legal counsel Vinay Chauhan, partner, Corporate Law Chambers, argued in front of the appellate tribunal that such a ban would cause irreparable loss for Karvy’s 8,000 employees and its 300,000 clients who trade with Karvy Stock Broking.

The ban was to come into effect after 21 days from the passing of the order by Sebi.

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