India's two leading exchanges NSE and BSE on Monday delivered a one-two punch on beleaguered Karvy Stock Broking Ltd.
While NSE suspended Karvy for non-compliance of regulatory provisions of the exchange, BSE deactivated the trading terminal altogether, causing irrepairable trouble to Karvy that counts itself as one of the country's largest discount brokerages.
In a statement, NSE said that Karvy was suspended from the capital market, futures and options, currency derivatives, debt, MFSS and commodity derivatives segments with immediate effect. Similarly, reacting to NSE's drastic measure, BSE deactivated Karvy's trading terminals in equity and debt segment and put them in RRM mode in equity derivatives, currency derivatives and commodity segment with immediate effect.
It means, investors won't be able to take new positions on the bourses, but to avoid spreading panic among the 2.4 lakh-odd customers of Karvy, the exchanges are allowing them to square off existing trades, migrate existing demat accounts to other brokerages.
In other words, trading activity for investors will be business as usual, except new positions cannot be made. When contacted, a Karvy official said that the management was studying the orders and will respond later in the day.
The move comes days after the capital markets regulator SEBI rejected Karvy's plea seeking modifications to the latter's order dated November, 22 that prevented the brokerage from exercising the Power of Attorney on behalf of clients to square off trades.
Last Thursday, Karvy had moved the Securities Appelate Tribunal (SAT) seeking temporary relief from the SEBI order so as to honour clients' payments. SEBI had also barred the brokerage from adding new customers based on NSE's preliminary report alleging misuse of clients' shares and illegal transfer of funds from clients' accounts to its group businesses.
An initial probe estimated the alleged misuse of funds to the tune of Rs 2,000 crore, which Karvy denied. The NSE-appointed EY is currently conducting a forensic audit and a report will be submitted shortly.
A SEBI investigation also pointed out that Karvy pledged clients' shares worth Rs 2,300 crore, which the regulator insists is against norms, though Karvy maintained there wasn't any wilful violation. As on November, Karvy group entities have a conslidated debt of Rs 3,133 crore.
Last Friday, Ananta Barua, whole-time director, SEBI, rejected the brokerage’s request, fearing further misuse. "Forensic audit of Karvy, initiated by the NSE (National Stock Exchange), is in progress and the full magnitude (of) misutilisation of clients’ securities (will) be known upon completion (of the) forensic audit. Therefore, taking into consideration, the facts and circumstances of the case including enormity of the prima facie violations observed against Karvy in the interim order, it would not be prudent to allow use of PoA (by) Karvy," Barua said.
In its submission, Karvy said SEBI's interim order was affecting over 2,000 clients. "Karvy has 120,000 clients, of which 300,000 are active. On an average, 20,000-25,000 clients transact on a daily basis, of which 15,000-18,000 clients are doing transactions through online trading platform. Of this, 2,000 to 2500 client transactions result into delivery," it said.