Sebi circular to prevent Karvy-like incidents soon

Mumbai: Securities and Exchange Board of India chairman Ajay Tyagi on Monday said the markets watchdog will soon come out with a circular to prevent Karvy-like incidents in which the broking firm had allegedly misused clients's securities, and asserted that whatever action required will be taken.

"We will just wait and see," he said, referring to the dues to be paid by Karvy Broking Services Ltd (KSBL).

As of February 14, Tyagi said the total dues of KSBL stood at Rs 1,189 crore. “Securities held by banks are Rs 511 crore, and the banks have no funds. The total shortfall in securities is Rs 183 crore and funds is Rs 495 crore. So, the shortfall is Rs 678 crore," he noted.

In November, the regulator barred KSBL from taking new brokerage clients after it was found that the brokerage firm had allegedly misused clients' securities to the tune of more than Rs 2,000 crore.

According to Tyagi, the NSE is in correspondence with Karvy and has also served it a notice.

"I have been told that Karvy has informed that they are in the process of selling a stake in one of their companies where term sheet has also been agreed upon…They are claiming that they will clear all outstanding amount by end of March. The amount involved in selling that subsidiary is good enough to take care of the fund requirements for clients and banks. We will just wait and see," Tyagi said.

"First priority will be to return the funds and securities of investors. Whatever else needs to be done will be done," he added.

He said on Karvy's dispute with lenders, the latter have recourse to proceed in the court of law and that Sebi not really examine whether Karvy is repaying banks.

Tyagi was speaking to the media after the Sebi board meeting. The meeting cleared the norms for investment advisers, proposing client level segregation.

The new rule will replace the old system in which the same client could either be on the advisory side or the distribution side.

The regulator also cleared the norms for regulatory sandbox. It will allow live testing of new financial products or services in a controlled environment. The exchanges and market infrastructure institutes have already implemented innovative sandbox.

Sebi also said that there will be enhanced eligibility criteria for registration as investment adviser, including enhanced net worth and qualification requirement.

Previously, corporate advisers, including individuals who were conducting their business through corporate structures like LLPs, could distribute products and render advisory services to the same client; provided the two services were separated from each other.

Tyagi, whose term ends later this month, said the regulator is actively looking at recategorisation of mid-cap and small-cap stocks for the mutual funds.

To ensure uniformity, Sebi in 2017 issued a list defining large-cap, mid-cap and small-cap companies. The list is being prepared once in six months by  Amfi in consultation with Sebi and stock exchanges.