SEBI cancels Karvy Stock Broking’s licence; to pay outstanding dues

The Securities and Exchange Board of India (SEBI) has cancelled the certificate of registration of fraud-hit brokerage Karvy Stock Broking for misappropriating clients' funds. The decision comes a month after the regulator banned Karvy Stock Broking and its promoter Comandur Parthasarathy from the securities market for 7 years. It also fined them a penalty of ₹21 crore for misusing powers.

The market regulator said irrespective of the cancellation of the certificate of registration, Karvy will continue to be liable for "anything done or omitted to be done as a stock broker", and will be responsible for payment of outstanding fees and dues to the regulator.

"In view of the aforesaid observations and findings, I... hereby cancel the Certificate of Registration of Karvy Stock Broking Ltd," an order passed by SEBI whole-time member Ashwani Bhatia said. The current order will come into force with immediate effect.

The order says a stock broker plays a critical role in the securities market. "It acts as an interface for retail investors and is therefore required to maintain high standards of integrity and fairness in the conduct of its business dealings and uphold the trust reposed by investors who hold their funds and securities with it."

SEBI has the duty to safeguard the interest of investors and ensure their rights are protected. The noticee (Karvy) was declared a "defaulter" and expelled by BSE on November 24, 2020, and by the NSE on November 23, 2020.

Sebi's observations said Karvy had not settled funds to the extent of ₹527.18 crore and securities worth ₹2,862.05 crore, which was returnable to its clients.

The audited financials of Karvy as of March 31, 2019, and the unaudited financials as of September 30, 2019, showed the loans taken from banks/NBFCs by KSBL had increased from ₹500.77 crore to ₹2,032.67 crore during this period.

The additional borrowings of ₹1,531.90 crore, during the period April 1, 2019, to September 30, 2019, ₹1,228.36 crore, was given as loans or advances or investments to group companies.

The FAR also records that based on an analysis of the total inflow or outflow between KSBL and its group entities, a net amount of around ₹1,120 crore was transferred from Karvy to its various group companies from FY2017 till October 19, 2019.

"A sample fund trail exercise was undertaken by the ForensicAuditor of the bank statements of KSBL, and it was observed that there were transactions from the bank accounts earmarked as ‘client bank accounts by KSBL to the ‘own bank accounts of KSBL. It was also noted that such funds were, in turn, transferred to the group companies of KSBL."

The Enforcement Directorate had arrested Karvy Group CMD Comandur Parthasarathy, and CFO G Krishna Hari, under the Prevention of Money Laundering Act (PMLA), 2002, in a matter involving "illegal diversion and pledging of the clients' securities" by the Karvy Stock Broking Ltd.