Karvy's trading licence suspended

Mumbai: BSE and NSE on Monday suspended Karvy Stock Broking Ltd’s trading licence for all segments due to non-compliance with exchange and securities market rules.

Besides the two leading bourses, Multi Commodity Exchange (MCX) and MSEI have also suspended the licence of the brokerage firm.

The BSE said it has deactivated trading terminals of Karvy in equity and debt segment and put them in the risk reduction mode in equity derivatives, currency derivatives and commodity segment.

Action by the bourses follows the November 22 Sebi order, which had in its preliminary findings held that the brokerage firm had misused client securities and used it for other purposes. Karvy had sold clients securities and the proceeds were transferred to related party businesses, such as Karvy Realty Ltd.

The Securities and Exchange Board of India had barred the firm from taking on new clients and limited its use of power of attorney for existing clients. The regulator had also directed the exchan-ges to initiate disciplinary proceedings against the broking firm.

This suspension order is a culmination of the disciplinary proceedings, where the exchange found that Karvy did not segregate broker securities from client securities and used client securities for fund raising.

Since the NSE suspension order has kicked in, Karvy's existing investors have been unable to square off their derivatives position, said an investor to Mint newspaper. Since payouts are pending from Karvy and positions are not being squared off it will add on to the woes of investors, he added. However, an NSE official clarified that investors are allowed to square off their existing open derivative position.

"Investors will be protected and they can square off at a later stage too" he said.

The mess at Karvy Stock Broking seems to be much bigger than first believed. The markets regulator now estimates the misuse of client securities by the broker at Rs 2,800 crore, 40 per cent more than the Rs 2,000 crore it estimated earlier.

The misutilisation is much larger according to the initial estimates of a forensic audit, Rafique Dada, the senior counsel appearing on behalf of Sebi at the Securities Appellate Tribunal (SAT), said on Friday.

Meanwhile, a big relief came for investors of Karvy on Monday when depository NSDL said in a statement that it has transferred securities into the accounts of the clients.

NSDL has transferred securities worth Rs 2,013.77 crore into the  accounts of 83,806 clients who have paid full amount for these securities.

Karvy Stock Broking has misused clients securities' worth Rs 2,800 crore, according to reports. It is also likely that the amount would increase further but that would emerge only after the forensic analysis is completed.

All the clients’ securities were pledged with banks and non-banking financial companies (NBFCs), a source added.

Banks have fund-based exposure of Rs 1,415 crore to Karvy and some more in non-fund-based guarantees.

Lenders are seeking ownership of the pledged shares, but Sebi is unlikely to consider the request, the reports said.

Clients would be at a disadvantage if the banks receive ownership of the shares and invoke the pledges, a source told the paper.

According to a report, 83,000 clients out of 90,000 clients of Karvy Stock Broking have received securities worth Rs 2,013.77 crore.

The securities have been transferred from Karvy's demat account to those of the 83,806 clients who have paid in full against these securities. The National Securities Depository Ltd has started the process of transferring securities in client demat account.