SAT extends status quo on Axis Bank-Karvy Stock Broking case till Jan 31

The Securities Appellate Tribunal (SAT) has extended its status quo order in case of Axis Bank and Karvy Stock Broking till January 31.

On January 15, Axis Bank had moved SAT seeking relief against an order passed by the Securities and Exchange Board of India (Sebi), which stated pledging of shares by Karvy -- where the clients had 'fully paid' -- was legally invalid.

Following this, SAT granted interim relief to Axis Bank, as in the past National Securities Depository had reversed securities to clients on the basis of Sebi’s November 2019 order pertaining to the Karvy case.

The Sebi in its order had identified Rs 171.74 crore worth of shares where clients had fully-paid the dues. Axis Bank had submitted that even in these shares there was indebtedness and the data needed to be re-examined.

In its order, Sebi said the transfer of unpaid client shares worth Rs 13.69 crore, which were pledged in favour of Axis Bank by Karvy, can be allowed if the bank is able to furnish proof of authorisation by each client.

Sebi’s whole-time member also observed that pledging of securities of unpaid clients required ‘explicit authorisation’ from each client and power of attorney (PoA) given by the clients was not sufficient authorisation to create such a pledge. Axis Bank in its arguments had said that the PoA was sufficient authorisation, the order pointed out.

Axis Bank had extended an overdraft facility to Karvy Stock Broking, against which the share pledges were created. Karvy owed Rs 80.47 crore to Axis Bank.

Sebi denies relief to lenders for flouting regulations in Karvy case

Noting that the pledging of shares done by Karvy Stock Broking didn’t have any legal sanctity, the Securities and Exchange Board of India (Sebi) on Friday denied relief to the lenders that had extended loans to the brokerage against securities.

According to the Sebi order, its June circular had made it clear that clients’ securities lying with a stock broker in “client collateral account” could not be pledged to banks or non-bank financial companies for raising funds.

The circular “directly concerned the business activity” of the lenders and they should have taken appropriate action to ensure its compliance, the order said.

It also observed that under “no circumstances, the securities received in payout can be retained by the stock broker beyond five trading days and or can be used for any other purpose”.

IndusInd Bank, Bajaj Finance, HDFC Bank and ICICI Bank had moved the Securities and Appellate Tribunal after the National Securities Depository transferred the client shares wrongfully pledged by Karvy Stock Broking back to client accounts.

"In the absence of corresponding trade instruction, the pledging of securities of such clients is also unauthorised and, hence, in law not treated as a valid pledge," it said.

IndusInd Bank, Bajaj Finance, HDFC Bank and ICICI Bank had moved the Securities and Appellate Tribunal (SAT) after the National Securities Depository (NSDL) transferred the client shares wrongfully pledged by Karvy Stock Broking back to client accounts.

The NSDL's move to transfer 80,000 client shares came after Sebi passed an interim order on November 22, which among other things, asked depositories and exchanges to initiate appropriate disciplinary proceedings in the Karvy matter.

After hearing the pleas of the lenders, SAT had directed Sebi to pass an order in the matter.

Karvy case: Appellate tribunal reserves order on Axis Bank's plea

The Securities and Appellate Tribunal (SAT) has reserved its order on the plea made by Axis Bank in the Karvy Stock Broking matter.

The lender had sought SAT's intervention following National Securities Depository's (NSDL) move to freeze the shares pledged by Karvy Stock Broking.

The brokerage had pledged shares to the lender against an overdraft facility of Rs 100 crore.

In its November 22 interim order, the Securities and Exchange Board of India (Sebi) had restrained transfer of securities from Karvy's account with immediate effect, except to those beneficial owners or clients, who had cleared all payments pertaining to the securities.

Axis Bank submitted that Karvy Stock Broking owed Rs 80 crore to the bank. However, as a result of the freeze, the bank was not able to invoke the pledge. The bank also added Sebi, Central Depository Services Ltd. and National Stock Exchange as parties to the case.

In earlier pleas, even though SAT heard the arguments made by the lenders, it decided against giving immediate relief to them. The SAT had directed Sebi to give final order in the matter.

The bench had also rapped appellants for approaching the tribunal on December 2 when the Sebi order was passed on November 22. It observed that "a lot of water has flown under the bridge" during this time.

Karvy Stock Broking moves SAT against Sebi order; hearing on Friday

Karvy Stock Broking has approached the Securities Appellate Tribunal (SAT) against the Sebi order that barred it from taking up new clients.

The matter will be heard by the tribunal on Friday.

Karvy will be represented by Vikram N of Visesha Law Services, according to the cause list put out by SAT.

Karvy denies misuse of client funds, says only Rs 50 cr dues pending

Karvy Stock Broking (KSBL) owes less than Rs 40 crore to its clients which will be repaid over the due course, said a top official. The brokerage refuted claims that it has defaulted to the tune of Rs 2,000 crore.

"Don't know where the Rs 2,000 crore figure has come from. I would like to say all the securities are intact. All these will be credited back to the regular accounts. So investors don't have to worry as to what will happen to their securities. There is no default in this particular case. The Sebi order says that the securities have not been dealt with properly. The have been utilised for other purposes," said a top official with the brokerage.

The official didn't want to come on order as the matter is sub judice.

On Friday, the Securities and Exchange Board of India (Sebi) passed an ex-parte interim order against KSBL barring it from taking new clients for misuse of client funds.

The official said some of the client shares were used for proprietary trading.

"What we do is, we sell on one exchange and buy it on other exchange. Basically it is arbitrage. These are the things, which have not been properly understood. Which we will explain the regulator soon. The number looks large as it is over a period of time. On a daily basis, it is a very small order,” the official said adding that “Some Rs 40-50 crore of client money needs to be paid, which will be done in normal course.”

The official said their clients are starting to worry after the Sebi order and the company is reaching out to them to explain the ground reality.

"We are communicating to everyone that everything will be fine. As we clarify on all the aspects, we will be able to regain trusts and things will be normal soon," the official said.

Besides the Sebi rap, KSBL also suffered a rating downgrade by ICRA.

The official said the downgrade had nothing to do with misuse of client funds.

“It is not linked to this. Please note it is just a downgrade and not a default. The rating is for Karvy stock Broking and its subsidiary companies. For the subsidiary companies the parent has to give a guarantee. But we are prohibited from giving a guarantee as it becomes a structured obligation under a new rule for brokers. Therefore, we haven't given any guarantee.”

Industry players said several brokers are feeling the heat of Sebi's move to bar them from using client funds — a practice that was fairly rampant in the broking industry.

In June, Sebi cracked the whip on such practice directing all the brokers to wound up all such accounts. It directed all the players to unpledge and return clients funds. Many brokers missed the August-31 deadline set by Sebi and also the extended deadline of September 30.

Sebi bans Karvy Stock Broking for Rs 2,000 crore client defaults

After a major scandal hit the stock markets with the brazen modus operandi of misusing clients' funds, the Securities and Exchange Board of India (Sebi) has banned Karvy Stock Broking (KSBL) from taking new clients and executing trades.

IANS had first reported the payment defaults occurring in Karvy Stock Broking and its clients filing complaints with the Prime Minister's Office (PMO), the Finance Ministry and Sebi.

Sebi said the unauthorised use of clients' funds creates a serious doubt over the conduct and integrity of KSBL.

This is one of the biggest cases of broker defaults in the equity segment and despite numerous regulations, the fact remains that clients' money and securities were brazenly misused for its own purposes by Karvy Stock Broking.

The defaults are to the tune of Rs 2,000 crore and in an ex-parte order, Sebi has directed that pending forensic audit, KSBL is prohibited from taking new clients with respect to its stock broking activities.

The depositories, i.e. NSDL and CDSL, in order to prevent further misuse of clients' securities by KSBL, are hereby directed not to act upon any instruction given by KSBL in pursuance of power of attorney given to KSBL by its clients with immediate effect, Sebi said.

The depositories shall monitor the movement of securities into and from the DP account of clients of KSBL as DP to ensure that clients' operations are not affected.

"Therefore, there is need for urgent regulatory intervention to prevent further misuse of clients' securities," said Ananta Barua, wholetime member, Sebi, in the order.

Detecting the fraud, the order noted that the securities lying in the aforesaid DP account actually belong to the clients who are the legitimate owners of the securities. Therefore, KSBL did not have any legal right to create any kind of pledge on these securities, the order said.

Even if clients' securities were pledged, it should have only been for meeting the obligation of the respective clients which was not observed in this case.

"Considering the issue of misuse of clients' securities by KSBL in an unauthorised manner, for its own use and purposely not disclosing the DP account no. 11458979, named KARVY STOCK BROKING LTD (BSE) to the Exchanges in their reporting create a serious doubt on the conduct and integrity of KSBL," Sebi said in the strongly worded order.

The NSE on Friday forwarded a preliminary report to Sebi on the non-compliances observed with respect to the pledging/misuse of client securities by KSBL. NSE has also stated that a detailed report in the matter will be submitted shortly.

KSBL has sold excess securities (securities not available in DP account) to the tune of Rs 485 crore through nine related clients till May 31, 2019. Further, KSBL has also transferred excess securities to six out of these nine related clients to the tune of Rs 162 crore till May 31, 2019.

On subsequent verification, it was observed that securities worth Rs 257.08 crore, pledged on behalf of four clients out of the aforesaid nine clients, were unpledged between June 1, 2019 and August 22, 2019 and securities worth of Rs 217.85 crore was recovered by KSBL from four out of the nine client accounts.

KSBL has also purchased securities in five out of the nine client accounts amounting to Rs 228.07 crore during the period from June 1, 2019 to September 8, 2019. KSBL had undertaken the recovery/purchase of securities to recoup the securities shortfall.

Prima facie, a net amount of Rs 1,096 crore has been transferred by KSBL to its group company, i.e. Karvy Realty Private Limited, between from April 1, 2016 and October 19, 2019.

Further, KSBL has sold excess securities (securities not available in DP account) to the tune of Rs 485 crore through nine related clients till May 31, 2019.

Further, Karvy had also transferred excess securities to six out of these nine related clients to the tune of Rs 162 crore till May 31, 2019. On subsequent verification, it was observed that securities worth Rs 257.08 crore pledged on behalf of four clients out of the aforesaid nine clients were unpledged between June 1, 2019 and August 22, 2019 and securities worth of Rs 217.85 crore was recovered by KSBL from four out of the nine client accounts.

KSBL has also purchased securities in five out of the nine client accounts amounting to Rs 228.07 crore between June 1, 2019 and September 8, 2019.