The National Stock Exchange of India Ltd (NSE) on Monday suspended Karvy Stock Broking Ltd’s trading licence for all segments due to non-compliance with exchange and Securities and Exchange Board of India (Sebi) norms, the exchange said in a circular.
Besides NSE, the BSE, Multi Commodity Exchange (MCX) and MSEI have also suspended the licence of the brokerage firm.
This action follows the 22 November Sebi order which had in its preliminary findings held that the brokerage firm had misused client securities and used it for other purposes. Karvy had sold clients securities and the proceeds were transferred to related party businesses, such as Karvy Realty Ltd.
Sebi had barred the firm from taking on new clients and limited its use of Power of Attorney for its existing clients. The regulator had also directed the exchanges to initiate disciplinary proceedings against the firm.
"This suspension order is a culmination of the disciplinary proceedings, where the exchange found that Karvy did not segregate broker securities from client securities and used client securities for fund raising," said a person familiar with the matter.
Since the NSE suspension order has kicked in, Karvy's existing investors have been unable to square off their derivatives position, said an investor to Mint. Since payouts are pending from Karvy and positions are not being squared off it will add on to the woes of investors, he added.
However, an NSE official clarified that investors are allowed to square-off their existing open derivative position. "Investors will be protected and they can square-off at later stage too" he said.
The mess at Karvy Stock Broking Ltd seems to be much bigger than first believed. The markets regulator now estimates the misuse of client securities by the broker at ₹2,800 crore, 40% more than the ₹2,000 crore it determined earlier, two people with direct knowledge of the matter said.
The misutilization is much larger according to the initial estimates of a forensic audit, Rafique Dada, the senior counsel appearing on behalf of Sebi at the Securities Appellate Tribunal (SAT), said on Friday.
Meanwhile, a big relief came for investors of Karvy on Monday when depository NSDL said in a statement that it has transferred securities into the accounts of the clients.
NSDL has transferred securities worth ₹2,013.77 crores in accounts of 83,806 clients who have paid full amount for these securities. A Mint report on Friday had said that 95,000 clients were awaiting payouts from Karvy.
One of the lenders to Karvy Bajaj Finance Ltd also moved SAT on Monday. The lender is aggrieved by Sebi order, which prevents it from accessing the pledges shares. The lender argued that these are bonafide pledges that it cannot access any more in the wake of Sebi directions. SAT reserved the matter for orders on Tuesday.