TMI Blog2019 (12) TMI 477X X X X Extracts X X X X X X X X Extracts X X X X ..... eptember 26, 2016, SEBI Circular No. SEBI/HO/MRD/DP/CIR/P/2016/13 dated December 16, 2016, SEBI Circular No. CIR/MRD/DP/54/2017 dated June 13, 2017, SEBI Circular No. CIR/HO/MIRSD/MIRSD2/CIR/P/2017/64 dated June 22, 2017 and Circular No. CIR/HO/MIRSD/DOP/CIR/P/2019 dated June 20, 2019, as discussed above. Therefore, there is need for urgent regulatory intervention to prevent further misuse of clients securities. In exercise of powers conferred upon me under Sections 11(1), 11(4) and 11B read with Section 19 of the SEBI Act, 1992 and Regulation 35 of SEBI (Intermediaries) Regulations, 2008, by way of this ex parte ad interim order, pending forensic audit, hereby issue the following directions: (i) KSBL is prohibited from taking new clients in respect of its stock broking activities; (ii) The Depositories i.e. NSDL and CDSL, in order to prevent further misuse of clients securities by KSBL, are hereby directed not to act upon any instruction given by KSBL in pursuance of power of attorney given to KSBL by its clients, with immediate effect; (iii) The Depositories shall monitor the movement of securities into and from the DP account of clients of KSBL as DP to ensure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er has not reported these 6 own bank accounts ( Stock Broker-own Account ) to Exchange which is required to be reported under the provisions of enhanced supervision, as stipulated under SEBI Circular No. SEBI/HO/MIRSD/MIRSD2/CIR/P/2016/95 dated September 26, 2016; S.No Bank Name Bank Account No. 1 HDFC BANK LTD 210130000134 2 ICICI BANK LIMITED 405034104 3 INDUSIND BANK LTD. 606014011496 4 AXIS BANK LIMITED 916030054913843 5 KOTAK MAHINDRA BANK 11210382 6 HDFC BANK LTD 00210140000014 (iii) The securities lying in the aforesaid DP account of KSBL, actually belong to the clients which are the legitimate owners of the pledged securities. Therefore, KSBL did not hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the aforesaid 9 clients, were unpledged during June 1, 2019 to August 22, 2019 and securities worth of ₹ 217.85 Crore were recovered by KSBL from 4 out of the said 9 client accounts. KSBL have also purchased securities in 5 out of the respective 9 client accounts amounting to ₹ 228.07 Crore during the period from June 1, 2019 to September 8, 2019. The details of 9 clients are as under: S. No. Client PAN Client Code Client Name Relation with KSBL 1 AAACK4247L 306184 KARVY CONSULTANTS LIMITED Direct subsidiary 2 AAACW4200H A020091 WIZARD INSURANCE SERVICES P LTD Having common email ids under the domain name of karvy.com and having common addresses in the UCC records. 3 AAACZ1892J A020004 ZENITH INSURANCE SERVICES PRIVATE LIMITED ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s should be able to produce the following records during inspection: (i) Receipt of collateral from client and acknowledgement issued to client on receipt of collateral. (ii) Client authorization for deposit of collateral with the exchange/clearing corporation/clearing house towards margin. (iii) Record of deposit of collateral with exchange/clearing corporation/clearing house. (iv) Record of return of collateral to client. (v) Credit of corporate action benefits to clients. 7. Also, SEBI Circular No. SEBI/HO/MRD/DP/CIR/P/2016/13 dated December 16, 2016 provides that the member shall transfer securities from pool account to the respective beneficiary account of their client within 1 working day after the pay-out day. The securities lying in the pool account beyond the stipulated 1 working day shall attract a penalty at the rate of 6 basis point per week on the value of securities. 8. Also, SEBI Circular No. SEBI/HO/MIRSD/MIRSD2/CIR/P/2016/95 dated September 26, 2016, on enhanced supervision provides uploading of clients' fund balance and securities balance by the Stock Brokers on Stock Exchange system and sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 58 of the SEBI (Depositories and Participants) Regulations, 1996 (since repealed) [Regulation 79 of SEBI (Depositories and Participants) Regulations, 1996. In this regard, SEBI Circular No. SEBI/HO/MIRSD/MIRSD2/CIR/P/2016/95 dated September 26, 2016 provides as follows: (i) Securities of only those clients can be pledged who have a debit balance in their ledger. (ii) Funds raised against such pledged securities for a client shall not exceed the debit balance in the ledger of that particular client. (iii) Funds raised against such pledged securities shall be credited only to the bank account named as Name of the Stock Broker - Client Account . (iv) The securities to be pledged shall be pledged from BO account tagged as Name of the Stock Broker - Client Account . 11. Also, a stock broker is prohibited from granting further exposure to the clients when debit balances arise out of client's failure to pay the required amount and such debit balances continues beyond the fifth trading day, as reckoned from date of pay-in, except, in accordance with the margin trading facility provided vide SEBI Circular No. CIR/MRD/DP/54/2017 date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CM ) in client collateral account , Client Margin Trading Securities account and client unpaid securities account cannot be pledged to the Banks/NBFCs for raising funds, even with authorization by client as the same would amount to fund based activity by TM/CM which is in contravention of Rule 8(1)(f) 8(3)(f) of Securities Contracts (Regulation) Rules, 1957. 14. Also, SEBI Circular No. CIR/HO/MIRSD/DOP/CIR/P/2019 dated June 20, 2019 provides that the client s securities already pledged in terms of Clause 2.5 of SEBI Circular No. SEBI/HO/MIRSD/MIRSD2/CIR/P/2016/95 dated September 26, 2016 read with Clause 2(c) of SEBI Circular No. CIR/HO/MIRSD/MIRSD2/CIR/P/2017/64 dated June 22, 2017 shall, by August 31, 2019, be either unpledged and returned to the clients upon fulfilment of pay-in obligation or disposed of after giving notice of 5 days to the client. 15. Also, SEBI Circular No. CIR/HO/MIRSD/DOP/CIR/P/2019 dated June 20, 2019 mandated Stock Exchange, Clearing Corporations and Depositories to put in place a mechanism for monitoring of the following: (i) Handling of unpaid clients securities by the TM/CM Mechanism of matching of transfer of sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rolled entities and have used the funds for its own purposes. KSBL in order to hide its misdeed has not even reported this DP account no. 11458979, named KARVY STOCK BROKING LTD (BSE) in the submissions made by it to NSE from January, 2019 to August, 2019. It is only during inspection by NSE, this account came to notice. NSE report finds that there are numerous transactions in DP account no. 11458979, named KARVY STOCK BROKING LTD (BSE) whereby securities of the clients have been moved. Securities of clients received in pay out are transferred from the pool account to this account and also securities lying in the demat account of the client(s) are also transferred into and from this account misusing power of attorney given by the client. 18. The securities lying in the aforesaid DP account actually belong to the clients which are the legitimate owners of the securities. Therefore, KSBL did not have any legal right to create any kind of pledge on these securities. Even if the client securities were pledged, it should have only been for meeting the obligation of the respective clients which was not observed in this case. Considering the issue of misuse of clients securitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties as per their respective bye laws, rules and regulations; 22. The findings recorded in the order are based on the prima facie examination of facts and prima facie violation of securities law, as observed above. 23. The present order has been passed under disciplinary proceedings against the Noticee for the prima facie violations of the Securities Laws, as mentioned in the order above. The observations in this order does not ipso facto entitle any client of the Noticee to claim their funds, stocks and securities, which claims are to be taken by such clients with the concerned stock exchanges/depositories in accordance with their respective bye-laws. 24. KSBL may file its objections/reply, if any, within twenty-one (21) days from the date of receipt of this Order. In the event the Noticee intend to avail an opportunity of personal hearing, it may appear before the Securities and Exchange Board of India at its Head Office at SEBI Bhavan - II, Plot No.C4-A, G Block, Bandra Kurla Complex, Bandra (East), Mumbai-400051 on December 16, 2019 at 02:30 PM. In the event of the Noticee failing to file reply within 21 days of receipt of this order or failing to ..... 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