Coming down on Karvy Stock Broking (KSBL) for misusing clients’ securities, Sebi Chairman Ajay Tyagi on Wednesday said the firm was indulging in activities which were “never allowed” and the regulator had hinted about it through a circular earlier this year.
Karvy had unauthorisedly pledged securities worth Rs 2,000 crore-Rs 2,300 crore of investors without their permission, despite the Sebi rule that securities or monies of a client should not be used for self or for any other client.
According to Tyagi, in June, the Securities and Exchange Board of India (Sebi) had made its stance “explicit” through a circular and hinted that there was no case for entities to indulge in such practices before that as well. “What is basically never allowed was being done. It is not that this separation was asked in June,” he said on the sidelines of the Organisation for Economic Co-operation and Development-Asian roundtable on corporate governance here.
“It cannot be anyone’s case even if these instructions were not so explicit that they can use clients’ securities for doing something (of) their own,” he added. He mentioned proprietary trades or investments in other businesses while elaborating on the possible activities that a brokerage may carry out. “This is a very basic thing which can’t be allowed,” he said.
Time for relook at governance norms for brokerages
With broking firms violating rules, Sebi would need to tighten corporate governance norms for such entities. There should be at least one mandatory independent director on the board of the brokerage, which would bring about transparency and accountability. Analysts say there has been no change in net worth requirement of brokers in the last 20 years, which needs a relook. Brokers also need to disclose related-party transactions done with any associates, subsidies or others.
While Sebi rules specify that a stock broker shall segregate securities or monies of the client and not use it for self or for any other client, the regulator tightened the norms further via a circular issued on June 20. In the circular, Sebi said that with effect from September 1, 2019, clients’ securities lying with the trading members/clearing members cannot be pledged to banks/NBFCs for raising funds even with authorisation by client.
It further said that the client’s securities already pledged shall be unpledged by August 31, 2019 and returned to the clients after fulfilment of pay-in obligation.
On November 22, Sebi banned KSBL from taking fresh business for violating Sebi norms, including transfer of client shares to itself and pledging of client shares to raise money for Karvy which later diverted it to its real estate arm.”In the Karvy case, it still remains a mystery about the Rs 1,096 crore transferred by Karvy to its real estate firm. Where is that money” asked a banking source.
While the Sebi order said a net amount of Rs 1,096 crore was transferred by KSBL to Karvy Realty, it transpires that the scam would be Rs 2,300 crore. In a report to Sebi, NSE observed that KSBL misused the power of attorney given by its clients and sold client securities in the market in a disguised manner through own controlled entities and used the funds for its own purposes.
In a 12-page ex-parte interim order, Sebi Whole Time Member Ananta Barua said there was a “need for urgent regulatory intervention to prevent further misuse of clients’ securities”.
Analysts said the regulator should tighten corporate governance norms for stock broking entities, to bring about transparency and accountability. Besides, net worth criteria of several Sebi registered intermediaries have gone up over the years.
“Mutual funds’ net worth has increased from Rs 10 crore to Rs 50 crore. PMS’ (portfolio management service) net worth has also increased from Rs 2 crore to Rs 5 crore last week. However,
there has been no change in the net worth requirement of brokers for the last 20 years and there should be a relook,” said Jimeet Modi, founder-CEO, Samco Securities. —WITH PTI