Goa News Online

SEBI bans KSBL, the promoter, from the securities market for seven years and fines him 21 billion rupees


Karvy Stock Broking Ltd. (KSBL) and its promoter Comandur Parthasarathy were sanctioned by Sebi on Friday with a seven-year ban from the securities market and a fine of Rs 21 crore for misappropriating customer money via improper use of the Power of Attorney granted to the company.

Furthermore, the Securities and Exchange Board of India (Sebi) stated in its final order that KSBL syphoned off funds raised by pledge of clients' securities to its group companies, Karvy Realty (India) Ltd and Karvy Capital Ltd.

In addition to the market restriction, the regulator fined KSBL and promoter/managing director Parthasarathy Rs. 13 crore and Rs. 8 crore, respectively.

While Parthasarathy is prohibited from holding the position of director or any other key managerial position in any listed public company or from working with any registered intermediary for a period of ten years, the same prohibition only lasts two years for the two former directors of KSBL, Bhagwan Das Narang and Jyothi Prasad.

The regulator also fined the two then-directors Rs. 5 lakh apiece. Within 45 days, the fine must be paid.

The regulatory body has ordered Karvy Realty and Karvy Capital to repay the Rs. 1,442.95 crore that the brokerage firm transferred to them. They have been given three months to refund the money to KSBL; if they fail to do so, NSE will seize the assets of the two businesses in an effort to recoup the payments.

Additionally, it has been mandated that KSBL, Parthasarathy, Karvy Realty, and Karvy Capital work with the NSE to refund funds and securities owned by KSBL clients.

The regulator determined that KSBL was abusing the Power of Attorney (PoA) that its customers had given it and was obtaining money by pledging the securities of its clients in an 88-page ruling. Additionally, KSBL was violating numerous legal provisions by diverting funds to entities in its group.

Through 9 related entities that were also its clients, KSBL sold surplus securities (security not available in DP account) to the tune of Rs 485 crore up until May 2019. Furthermore, 6 of these 9 related entities received excess securities that had been transferred by KSBL.

According to the ruling, by September 2019, KSBL's total borrowing was Rs 2,032.67 crore, while the stock broker's value of pledged securities was Rs 2,700 crore. KSBL was obtaining loans from financial institutions by using the shares of its customers as collateral.

The issue concerns KSBL's extensive asset mobilisation campaign, which was followed by a significant fund-raising effort from financial institutions utilising the assets that were obtained from customers with a promise to pay interest. Due to the misappropriation and diversion of these money to KSBL's affiliated firms, it was unable to fulfil its duty to settle securities and funds with customers in accordance with regulatory requirements.

It has been sufficiently revealed by EY in its forensic audit that the KSBL treasury team used to determine the amount of money needed for its operations each day in light of the volume of transactions made throughout the day.

According to Sebi, “The said calculation used to be forwarded to operation team, which further used to randomly select securities lying in different client accounts for placing them under pledge with financial institutions to raise funds through LAS (Loan Against Securities) facility to meet the funds requirement.”

The watchdog prohibited KSBL from accepting new brokerage customers in November 2019 via an interim order after it was discovered that the company had allegedly misappropriated client securities to the tune of more than Rs 2,000 crore.

The limited purpose examination of KSBL that was carried out by it on August 19, 2019, covering the time period starting on January 1, 2019, was the basis for the exchange's preliminary report.

The interim order was issued after NSE filed a draught report to Sebi on violations regarding the pledging or improper use of customers' securities by KSBL. Finally, Sebi confirmed the directives through the interim order in November 2020.

To investigate the lack of money and securities discovered during a joint inspection by Sebi, exchanges (NSE and BSE), and depositories (NSDL and CDSL), the NSE had recruited Ernst & Young LLP (EY) as a forensic auditor. It was to determine the level of misappropriation of money and securities as well as other breaches committed by it, as well as to determine the part played by KSBL's management and directors in the aforementioned wrongdoings.


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