The gag order against Karvy Broking for defaulting payments to clients issued by the markets regulator Securities and Exchange Board of India (SEBI) is likely to lead to a wider probe on the brokerage houses in India.
Two sources familiar with the development told DH that the further course of action would be decided early next week. “Since the order came in late Friday evening, the further course will be decided only on Monday,” sources said.
The executives of Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) would be holding the deliberation in this regard during the week starting Monday.
“Some more should unravel - brokers were having a field day on client monies and assets. Without technology, and without access to this kind of free funding, the Broking business may make little sense. I am guessing there is a larger investigation on every broker who was doing this before the October deadline,” another source said.
As of date, it is estimated that around 5,000 brokers and brokerage houses are active in Indian equity markets.
SEBI banned Karvy Stock Broking (KSBL) for client defaults to the tune of Rs 2,000 crore making it one of the country’s largest cases of equity broker defaults. In an ex-parte interim order, SEBI banned Karvy from not only taking new clients but also from executing trades for existing clients.
A recent inspection by the NSE, that took place in August this year, revealed that KSBL transferred a net amount Rs 1,096 crore to its group company Karvy Realty between April 2016 and October 2019. KSBL sold pledged client shares via off-market transfer as its own in five out of nine client accounts amounting to Rs 228.07 crore in 2019 and transferred stocks worth Rs 27.8 crore from 156 clients who have not executed a single trade with them.
KSBL credited the funds raised by pledging of client securities to 6 of its own bank accounts (Stock Broker-own Account) instead of the “Stock Broker-Client Account” and further has not reported these 6 own bank accounts, the SEBI order said. The six bank accounts of the brokerage include two accounts with HDFC Bank and one each with ICICI Bank, IndusInd Bank, Axis Bank and Kotak Mahindra Bank.
Stocks worth Rs 257.08 crore, pledged on behalf of four clients were un-pledged between June and August 2019. “It has also been intimated by NSE that it has appointed a forensic auditor to examine in detail the cases of misuse of client funds and securities by KSBL,” Sebi said in a 12-page order.
In the said report, NSE has requested SEBI to take appropriate and expeditious action in the matter.