The National Stock Exchange of India Limited (NSE) has suspended Karvy Stock Broking Limited due to non-compliance of regulatory provisions of the stock exchange with effect from December 02, 2019. NSE said in a circular that Karvy’s licence has been suspended in the capital market, futures and options, currency derivatives, debt, MFSS and commodity derivatives segments.
Reports say that BSE, Multi Commodity Exchange (MCX) and MSEI have also suspended Karvy’s licence.
This comes over a week after Securities and Exchange Board of India (SEBI) barred Karvy from taking in new clients after a preliminary report by NSE stated that the stockbroker has allegedly misused clients’ funds.
SEBI had also directed NSDL and CDSL from honouring instructions given by Karvy using the power of attorney given to it by clients.
The National Securities Depository Ltd (NSDL) and the Central Depository Services India Ltd (CDSL) are the two depositories in India.
What did Karvy do?
Karvy is a stockbroker, which means that it is the middleman between an investor and the stock exchange to buy and sell shares. It communicates to Bombay Stock Exchange or National Stock Exchange on behalf of an investor to execute buying or selling of a share. Investors (also referred to as clients) give Karvy power of attorney (basically the authority) to debit the shares directly from the client's demat account.
These shares are held either in NSDL or CDSL. Think of them as banks.
So, SEBI asking CDSL and NSDL not to honour instructions given by Karvy essentially means that Karvy cannot execute transactions on behalf of its clients.
The allegation against Karvy is that it misused the shares of its clients to fund its real estate arm. Karvy also allegedly transferred shares from clients’ accounts to their own account without routing it through the stock exchange. As per reports, Rs 1096 crore was transferred from KSBL to its real estate arm between April 1, 2016 to October 19, 2019.
A Livemint report on December 1 cited sources as saying that SEBI estimates the misuse of client securities to be at Rs 2,800 crore, which is 40% more than the Rs 2,000 crore it has determined earlier.
The NSE and BSE suspensions could further add to the woes of investors, who have already been facing a difficult in receiving pay-outs from Karvy.
After the SEBI order, nearly one lakh investors were unable to gain access to their shares and receive payouts from Karvy. Several also alleged that Karvy was not allowing them to move their accounts to another broking firm and was deliberately delaying payouts.
A Livemint report has quoted an NSE official as saying that despite Karvy’s suspension, investors will be protected and can square-off their derivatives positions at a later stage too.