“Taking into consideration the facts and circumstances of the case including enormity of the prima facie violations observed against Karvy Stock Broking in the interim order, it would not be prudent to allow it the use of PoA given by its clients, as prayed by the firm. Thus, the clients of Karvy Stock Broking who seek to sell securities through it may do so by using electronic or physical delivery instruction slip (DIS) only,” the order said. A DIS is a physical document that is used by a stock market investor to transfer stocks, that he sold to the buyer, through the exchange and clearing house.
Earlier on Thursday evening, the Securities Appellate Tribunal (SAT) had asked Sebi to decide if it can allow Karvy Stock Broking to use its clients’ PoAs in a limited manner to settle trades done by them. Prior to that, Karvy Stock Broking had also written to Sebi independently for the same relaxation.
The Sebi’s latest order also mentioned that Karvy Stock Broking, in one demat account under its name on the BSE, which was never disclosed by the firm in its filing with stock exchanges, securities worth about Rs 2,300 crore of more than 95,000 clients, were unauthorisedly transferred into, “by misusing the PoA given by its clients”. For the last one week, the magnitude of the scandal was estimated to be about Rs 2,000 crore. Funds raised through unauthorised use of PoAs and pledging with banks were diverted to Karvy’s real estate arm, the Sebi order had mentioned.
This order by Sebi was passed after its officials met a top compliance officer from Karvy Stock Broking, which was one of the conditions of the SAT order.
On November 22, the markets regulator had banned Karvy Stock Broking from taking new clients and had also asked the two depositories not to transfer any shares for the firm’s clients using PoAs. The order was passed after an inspection by the NSE found that Karvy Stock Broking had misused clients’ PoAs to channelise their funds and loans raised against securities to a group firm.
The Sebi order had also said that the depositories “shall monitor the movement of securities into and from the depository participants (in this case the broker) account of clients of Karvy Stock Broking to ensure that clients’ operations are not affected”.
The Sebi order relating to PoAs has wider ramifications for possible default by the broker. It means that all those Karvy Stock Broking clients who had sold shares on those two days and had given PoAs to the broker to deliver those shares to their buyers through the clearing mechanism could not be completed, leading to possible default. Karvy Stock Broking had moved SAT to seek clarifications with regard to restrictions relating to settlement of trades through PoAs as the same was creating problems for its clients.
A top official with the Karvy group told TOI that “since our clients in the broking operations were facing problems with settlement and some of our shareholders wanted clarity relating to the Sebi order, the company had to move the SAT.”