Securities and Exchanges Board of India (Sebi) on May 31 cancelled Karvy Stock Broking Ltd.’s registration for misusing clients’ funds and securities, highlighting the challenges for investors in navigating the broker-client relationship.
Sebi found Karvy guilty of transferring clients’ funds to its accounts illegally. It is also accused of raising funds by pledging clients’ securities without their consent, which violated Sebi rules.
Karvy’s Sebi Rule Violations
Sebi has strict regulations governing the withdrawal of funds from clients’ accounts. Money can only be withdrawn for specific purposes, including payment of debts due to the broker.
Sebi noted that the securities of clients who had no negative balance (i.e., zero or credit balances) were also pledged by the broker. These securities were transferred to beneficiary accounts of the broker without obtaining consent from the clients. Furthermore, Karvy Broking Ltd also did not follow the stock lending and borrowing mechanism to borrow stocks from clients, the Sebi said.
SEBI has mandated that client collateral and securities should only be used to meet margin requirements or pay-in obligations. In 2019, Sebi reiterated that client securities received as collateral must be deposited with stock exchanges, clearing corporations, or clearing houses to fulfill the respective client's margin requirement.
Trading and clearing members are strictly prohibited from pledging client securities held in specific accounts to banks or non-banking financial corporations for raising funds, even with client authorisation, after September 30, 2019. However, Karvy violated these provisions by pledging client securities amounting to Rs. 2,700 Crore, using shares of its clients as collateral. Also Karvy had borrowed a total of Rs. 2,032 crore from financial institutions by using client shares as collateral.
Karvy Stock Broking Ltd failed to settle clients' funds and securities, neglected to provide necessary account details, and hindered the forensic auditor's assessment, according to Sebi. The regulator mandates brokers to settle funds and securities either quarterly or monthly, depending on client preference for running accounts, or within 24 hours for other cases.
Investors should familiarise themselves with Sebi regulations concerning the withdrawal and utilisation of clients' funds and securities. Regularly monitor one’s trading and demat accounts. If any utilisation is done for non-permitted purposes or any collateralisation is done, report timely to Sebi.
