Yesterday, November 22, SEBI issued an interim ex parte order against Karvy Stock Broking Ltd. The order prevented Karvy from taking on new clients. He also ordered the two custodians – NSDL and CDSL to honor the instructions given by Karvy. These instructions are given in the normal course of events for the settlement of trades through a power of attorney (PoA). The order was issued against Karvy for numerous violations of SEBI standards, including transferring client shares to himself and pledging client shares to raise money for himself. If you are one of approximately 2.44,000 Karvy Stock Broking customers, what should you do?
What Karvy did
According to the SEBI order, Karvy transferred the titles of the clients to himself. The broker also raised funds by pledging securities from clients and transferred this money to its own account. The exact amounts of the various breaches are a bit fuzzy. According to the SEBI order, a net amount of ₹1096 crore was transferred by Karvy Stock Broking to its group company, Karvy Realty Private Limited. In response to the violations, the SEBI order requires custodians to monitor the movement of securities to and from the custody accounts of Karvy Stock Broking clients. However, it also prohibits custodians from honoring Karvy Stock Broking instructions.
According to a senior executive at one of India’s largest brokers, SEBI order on Karvy’s instructions based on clients’ PoAs may prevent existing clients’ trades from settling. India follows a T+2 cycle which means that client trades executed on Thursday and Friday will be settled on Monday and Tuesday respectively. “Sebi’s directive against Karvy virtually prevents the brokerage firm from executing and settling future trades on behalf of clients. Even trades that were executed on Friday cannot be settled by Karvy and custodians should monitor delivery for settlement of these transactions,” Anubhav said. Ghosh, Partner, Law Point.
In such a scenario, the counterparty is also affected, but safeguards are in place for it. When the seller is unable to deliver the shares, the exchange initiates an auction to buy and deliver the shares to the buyer. Sanctions are also imposed on the defaulting party. As a safety net, the exchanges also have a settlement guarantee fund to ensure that trades are honored. Futures and options (F&O) transactions will not be directly affected by the order, but if the broker fails to maintain margin with the exchange, these will be compensated by the exchange, the aforementioned senior executive said. . This will end up hurting the client who undertook the F&O trade in question, he added. Many F&O trades also require cash delivery and may therefore be affected.
The Karvy Group is engaged in many other businesses such as commodity brokerage, wealth management, mutual fund registration and transfer (RTA) services and central record keeping services for NPS. These will not be directly affected by brokerage violations and the resulting SEBI order.
what you should do
“Clients can open a new demat account and transfer the securities that are in Karvy demat’s account into it,” the aforementioned senior executive said. “However, it may require a lot of paperwork, such as indemnification obligations. to monitor the movement of securities to and from clients’ demat accounts, this will further slow down the process,” he added. If you have unused funds in your Karvy brokerage account, immediately transfer them to your own bank account According to a 2009 SEBI circular, all unused client funds must be transferred by the relevant broker to the client’s bank account at least one times every 90 days. However, in your case, the 90 days may not have passed. If your trades failed due to Karvy’s defaults, if your securities were transferred to Karvy’s own accounts, or if you notice another irregularity, file a complaint with SEBI.You can read more about this procedure here.
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