Mumbai: Indian exchanges on Monday suspended the trading licence of Karvy Stock Broking Ltd (KSBL) after discovering that the firm violated exchange rules as well as those of the market regulator.
Karvy was indulging in merging its own securities with client securities and used client securities for funding purposes, the exchanges found in their disciplinary proceedings. The NSE, BSE, Multi Commodity Exchange (MCX) and MSEI have suspended the licence of the brokerage firm across all segments—equity, commodity and currency.
The step puts a complete halt on Karvy’s operations, with the firm now facing multiple restrictions including a bar on adding clients and inability to use its power of attorney for its existing clients. The broker can now only square off existing clients’ open derivatives positions.
This action follows the 22 November Securities and Exchange Board of India (Sebi) order, which in its preliminary findings held that Karvy had misused client securities and used it for other purposes. Karvy had sold some clients’ securities and transferred the proceeds to related party firms such as Karvy Realty Ltd.
The mess at Karvy appears to be much bigger than first believed with Sebi now estimating the misuse of client securities at ₹2,800 crore, 40% more than the ₹2,000 crore it determined earlier, Mint had reported on 2 December.
On Monday, soon after the suspension order which was first issued by the NSE, Karvy appealed against the decision. The matter will be heard on Tuesday. BSE issued its suspension notice soon after NSE.
Karvy also made a separate plea against Sebi’s 29 November order where it had refused an interim relief to the broker on usage of Power of Attorney (PoA).
In its petition, a copy of which has been reviewed by Mint, the firm argued that the lack of PoA is posing difficulties in honouring client payouts.
It said that Sebi has not considered the difficulties and inconvenience faced by existing clients and the monetary losses and penalties to be faced by the investors.
However, Sebi in its order late Friday said that clients can take delivery of securities by using ‘Delivery Instruction Slip’ or DIS and even electronic DIS. NSDL, in a press statement on Monday, said that it has effected transfer of ₹2013.77 crore worth of securities to over 83,000 clients.
Investors can use these slips to get delivery of securities in their demat accounts from pool accounts or depositories.
Electronic DIS also removes the need for physical delivery slips. Some brokerage firms are already using the electronic DIS for transfer of securities to client demat accounts.
“Electronic DIS is a process where an investor requires an OTP confirmation for every delivery transaction that is sent to the exchange. This system ensures that no delivery transaction happens without investor’s express consent. There is a possibility of brokerage houses abusing their blanket Power of Attorney (POA) privileges and e-DIS curbs this possibility," said Shrini Viswanath, co-founder & CTO, Upstox, a brokerage firm which uses the electronic DIS.