The market regulator, SEBI, by an interim order dated November 22, prohibited Karvy Stock Broking Limited (KSBL) from registering new clients. Apart from this, the order also prohibits any trade on the client’s account, if it is executed on the basis of the power of attorney (POA) given to KSBL by its clients.
Clients’ partially paid shares held in the demat account named Karvy Stock Broking Limited can only be withdrawn if clients make full payment for the shares. Once the shares are fully paid up, they can be transferred to the client’s beneficiary account. Other transactions involving movement of shares in and out of demat accounts are, however, permitted. But the custodians – NSDL or CDSL – have been asked to monitor these transactions closely.
Other than the above, the SEBI order did not prohibit any other transactions. But investors would find it difficult to withdraw their funds and securities from their respective accounts.
According to a staff member at the Chennai branch, these restrictions are temporary due to the ongoing forensic audit. Therefore, clients are not allowed to withdraw funds from their trading account until Monday, he added.
It remains to be seen whether these restrictions will be relaxed by next week, as reported in the agencies. But even if the company makes good on its promise to resume operations and ease “temporary” restrictions, all may not yet be all for customers.
Indeed, although this is an interim ex parte order, the SEBI ban will continue to prevail until a subsequent order is passed by SEBI. KSBL has reportedly appealed to the SAT to ease restrictions on customer transactions, but the outcome is not yet known.
It may not be in the client’s interest to continue their trading account with KSBL, even after the temporary restrictions are relaxed.
Pack your bags and go
There are serious allegations made in the SEBI order. One demat account and six bank accounts of KSBL which have not been reported to the exchange. Furthermore, KSBL misused the POA given to it by its clients, to wrongfully pledge their shares and generate funds for its own use. Apart from this, the report also highlights several other fraudulent transactions including over-selling of securities worth Rs 485 crore, off-market transfer of shares from client accounts and net transfer of of Rs 1,096 crore to one of its group companies – Karvy Realty Private Limited.
Although KSBL has time to respond to SEBI’s order, the fact that SEBI has banned the company from taking on new clients in the meantime shows that the regulator is seriously concerned about the risk to investors.
Want to stay?
Even if KSBL’s operations resume after the forensic audit, the restrictions imposed by the SEBI order are likely to remain.
The SEBI order does not, however, prevent KSBL’s customers from continuing their business transactions. You may continue to execute your trades online, once authorized by KSBL, if you have an electronic or online trading account with KSBL.
But, if you were one of those who made transactions through phone calls made to your respective account manager or reseller, the transactions can no longer be executed, as KSBL has to use the PoA given by the customers in those transactions .
You may, however, continue to execute your trades by submitting a physical delivery instruction slip to KSBL after each sale of securities.
Partially Paid Shares
Clients should however note that after the audit, traders will not be able to continue their margin trading (according to the staff mentioned above). Buying shares will only be possible by depositing the full amount in advance to the trading account.
If you have a margin funded trading account with KSBL, the only way to transfer your shares from KSBL’s demat account to your account is to fully release them. Following SEBI’s interim order, the company is currently not permitted to make any further movements from the KSBL account.
However, you can reconcile the position involving partially paid shares, if you wish.
If you are now skeptical of the actions of KSBL and want to trade hassle-free, it is advisable to open a new demat account with another depository participant.
To avoid paying taxes, you must close your account with KSBL and transfer all securities to the new account in your name. If the shares are transferred to any other person, the respective taxes will apply.
Be sure to include some do’s and don’ts in your power of attorney this time around. If the broker facilitates electronic trading and electronic delivery of shares from the demat account, such a PoA may not be necessary.