Capital markets regulator Securities and Exchange Board of India (Sebi) on Wednesday cancelled the registration of brokerage firm Karvy Stock Broking Ltd (KSBL) for mis-utilising clients’ funds and securities.

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SEBI's investigation revealed that Karvy had engaged in the transfer of funds from clients' accounts to its own accounts, which were subsequently transferred to group companies associated with the brokerage house. Furthermore, Karvy had raised funds by pledging clients' securities without their consent.

The data uncovered by SEBI indicates that Karvy had accumulated borrowing of Rs 2,032.67 crore as of September 2019. This borrowing was facilitated by pledging shares of its clients as collateral. The value of securities pledged by the brokerage firm during this period was estimated at Rs 2,700 crore.

In addition, SEBI's order highlights several other violations committed by Karvy. The firm failed to settle clients' funds and securities, failed to provide details of bank accounts and depository participant accounts, and failed to cooperate with the forensic auditor during the assessment of assets and liabilities pertaining to clients.

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Noting that Karvy has been declared a defaulter and expelled by BSE and NSE in November 2020, Sebi has cancelled "the certificate of registration of Karvy Stock Broking Ltd" under the Intermediaries Regulations.

This recent action follows Karvy's declaration as a defaulter and subsequent expulsion by both the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) in November 2020. SEBI's decision to cancel Karvy Stock Broking Ltd's certificate of registration falls under the Intermediaries Regulations.

Last month, SEBI had already barred Karvy and its promoter, Comandur Parthasarathy, from the securities market for a period of seven years. Additionally, a penalty of Rs 21 crore was imposed on them for misappropriating clients' funds through the misuse of Power of Attorney.

In November 2019, the watchdog, through its interim order, barred KSBL from taking new brokerage clients after it was found that the firm had allegedly misused clients’ securities to the tune of over Rs 2,000 crore. The interim order came after NSE forwarded a preliminary report to Sebi on non-compliances observed with respect to pledging or misuse of clients’ securities by Karvy Stock Broking. Finally, the directions issued through the interim order were confirmed by Sebi in November 2020.

The preliminary report was based on a limited purpose inspection conducted by NSE on August 19, 2019, covering the period from January 1, 2019, onwards.

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