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TMI Blog2019 (12) TMI 477X X X X Extracts X X X X X X X X Extracts X X X X ..... etailed report in the matter will be submitted shortly. The said preliminary report is the result of the limited purpose inspection of KSBL conducted by NSE on August 19, 2019 covering a period from January 01, 2019 onwards. Key findings made in the said report are as under: (i) KSBL did not report the DP account no. 11458979, named KARVY STOCK BROKING LTD (BSE) in the filings made by it from January, 2019 to August, 2019. The said DP account was observed to be categorised as Beneficiary Client and was opened on December 20, 2000; (ii) KSBL credited the funds raised by pledging of client securities to 6 of its own bank accounts ("Stock Broker-own Account") instead of the "Stock Broker-Client Account" and further 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tune of Rs. 162 crores till May 31, 2019. On subsequent verification, it is observed that securities worth Rs. 257.08 crores pledged on behalf of 4 clients out of the aforesaid 9 clients, were unpledged during June 1, 2019 to August 22, 2019 and securities worth of Rs. 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 Rs. 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 4 AABCB8927H A020005 BUOYANT INSURANCE SERVICES PRIVATE LIMITED 5 AABCN5526A A08002 NOVA WEALTH MANAGEMENT SERVICES PVT LTD 6 AABCV4837C HBH5691 VITALINK WEALTH ADVISORY SERVICES PVT LTD 7 AACCC0267C A020002 CLASSIC WEALTH MANAGEMENT S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lty 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 specifically provides as under: (i) The Stock Exchanges shall put in place a mechanism and ensure that stock brokers upload the following data on a monthly basis for every client onto each Stock Exchange system where the broker is a member. (ii) Exchange-wise end of day fund balance as per the client ledger, consolidated across all segments and also net funds payable or receivable by the broker to/from the client across all Exchanges. (iii) End of day securities balances ISIN wise (as on last trading day of the month) and End of day securities balances (as on last trading day of the month) consolidated ISIN wise (i.e., total number of ISINs and total number of securities across all ISINs). (iv) ISIN wise number of securities pledged, if any, and the funds raised from the pledging of such securities and consolidated number of securities pledged (i.e., total number of ISI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 dated June 13, 2017 or as may be issued from time to time. 12. Also, SEBI Circular No. CIR/HO/MIRSD/DOP/CIR/P/2019 dated June 20, 2019 on Handling of Clients' Securities by Trading Members/Clearing Members, inter-alia provides as follows: (i) The securities received in pay-out against which payment has been made by clients, shall be transferred to the demat account of the respective clients within one working day of the payout. Such securities shall be transferred directly from the pool account of the TM/CM to the demat account of the respective client; (ii) With regard to securities that have not been paid for in full by the clients (unpaid securities), a separate client account titled - "client unpaid securities account" shall be opened by the TM/CM. Unpaid securities shall be transferred to such "client unpaid securities account" from the pool account of the concerned TM/CM; (iii) The securities kept in the 'client unpaid securities account' shall either be tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anism for monitoring of the following: (i) Handling of unpaid clients' securities by the TM/CM - Mechanism of matching of transfer of securities with the securities obligation as obtained from the clearing corporation with respect to the following: a. Securities transferred from the client unpaid securities account to the pool account; b. Securities transferred from the client unpaid securities account to the concerned client account; c. Securities transferred from pool account to the concerned client account. (ii) All the DP accounts tagged as "Stock Broker - Client Account" are wound up before August 31, 2019. (iii) Securities lying with TM/CM in client collateral account, client margin trading securities account and client unpaid securities account shall not be permitted to be pledged/transferred to Banks/NBFCs for raising funds by TM/CM. SEBI Circular No. CIR/HO/MIRSD/DOP/CIR/P/2019 dated June 20, 2019 was to come into effect from September 01, 2019. However, based on the representation received from the brokers stating that they have to transfer the client securities to respective client accounts after getting released from respective NBFCs and Banks and al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erved in this case. Considering the issue of misuse of clients' securities by KSBL in unauthorized manner, for its own use and purposely not disclosing the DP account no. 11458979, named KARVY STOCK BROKING LTD (BSE) to the Exchanges in their reporting create a serious doubt on the conduct and integrity of KSBL. 19. The acts of KSBL are prima facie in violation of Stock Broker Regulations, SEBI circular no. SMD/SED/CIR/93/23321 dated November 18, 1993, SEBI Circular No. MRD/DOP/SE/Cir - 11/2008 dated April 17, 2008, SEBI Circular No. SEBI/HO/MIRSD/MIRSD2/CIR/P/2016/95 dated September 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. 20. Therefore, there is need for urgent regulatory intervention to prevent further misuse of clients' securities. 21. Under the above circumstances, I, 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 (Interme ..... X X X X Extracts X X X X X X X X Extracts X X X X
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