SEBI cancels Karvy’s Certificate of Registration, after banning from Markets for 7 years

On May 31, Karvy Stock Broking's registration certificate was cancelled by the Indian market regulator SEBI and fined Rs 21 crore on Karvy Stock broking ltd and its promoters. SEBI had earlier put a seven-year market ban on the company and its promoters for using client securities as collateral to acquire money and then transferring that money to connected firms. SEBI noted that KSBL has violated its guidelines by pledging client securities worth Rs 2,700 crore.

The regulator found in its 88-page order that KSBL was misusing its clients' powers of attorney (PoA) and pledged their securities to raise money. Additionally, KSBL was violating several laws by diverting funds to entities in its group while doing so.

“Irrespective of the cancellation of the Certificate of Registration, the Notice shall continue to be liable for anything done or omitted to be done as a Stock Broker and continue to be responsible for payment of outstanding fees and dues, if any, payable to SEBI,” the SEBI order stated.

Through 9 related entities that were also its clients, KSBL sold surplus securities (security not available in DP account) to Rs 485 crore until May 2019. Furthermore, 6 of these 9 related entities received excess securities that had been transferred by KSBL. The limited-purpose inspection of KSBL that was carried out by it on August 19, 2019, covering the time period starting on January 1, 2019, was the basis for the exchange's preliminary report.

On November 24, 2020, the BSE and on November 23, 2020, the NSE both pronounced Karvy a defaulter and dismissed it. For the alleged weak procedure for detecting the misuse of client securities by Karvy Stock Broking Ltd., the SEBI fined Karvy on BSE and NSE Rs 3 crore and 2 crore respectively. Steps were taken by SEBI after the Karvy scam

Since 2019, SEBI has issued a number of circulars in an effort to stop the recurrence of this scam. It prevents brokers from pooling client securities or funds and requires segregated accounts. In broking agreements, powers of attorney are no longer required. Every pledge/unpledged transaction, as well as the funds/security balances with depositories, are all readily visible to investors.

Brokers are no longer permitted to offer margin funding backed by client shares; instead, they must use their own funds. A direct ASBA facility for secondary market investors was recently proposed by SEBI in an effort to completely remove intermediaries from stock transactions. The Risk with Brokers of Karvy

Some brokers were using client funds for their own purposes without the knowledge or consent of the client. It has also been seen that by pledging investors' shares with banks to obtain BGs, which they then submit to clearing corporations to obtain better leverage and higher trading limits, brokers and CMs have been putting the market and clients at risk.

Top 10 brokers for investments in the Market in 2023

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1. Zerodha

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8. Motilal Oswal

9. Kotak Securities

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