In an ex-parte order Sebi banned the broker from taking new clients in its broking business.
Ajay Tyagi, the chairman of the Securities and Exchange Board of India (Sebi), on Wednesday said brokers were never allowed to use client securities for their own business. These comments from the market regulator come against the investigation by the exchanges revealed that Karvy Stock Broking (KSBL) had pledged client securities to raise funds.
In an ex-parte order Sebi banned the broker from taking new clients in its broking business. The market regulator, in its order last week, which was issued on the basis of observations made by the NSE in the course of its routine inspection, had said Karvy had transferred Rs 1,096 crore to a subsidiary company — Karvy Realty.
In June 2019, Sebi had issued a circular restricting brokers from pledging client securities to raise finance with effect from August 1, 2019. The regulator also mandated that all existing pledged positions had to be unwound by September 30.
Following this, there has been a chant for tighter regulations for brokers. However, the regulator said regulations never allowed this in the first place. Speaking on the sidelines of the OECD-Asian Roundtable on Corporate Governance in Mumbai on Wednesday, Tyagi said, “More than governance, what is basically never allowed was being done. It is not that this separation was asked in June. In June the circular came that you should separate the account and it now five months down the line. It is not anyone’s guess, even if these instructions were not that explicit, that they (brokers) can use clients securities for doing something of their own or investing in their own other business. This is a very basic thing, which can’t be allowed.”
Speaking at the event, Tyagi further said Sebi was also looking at improving the existing norms on related party transactions. “Increasing prevalence and use of company groups has brought several governance issues to the fore, especially on related party transactions. Use of complicated group structures and complex related party transactions increase the concern of siphoning of funds, money laundering, round tripping, etc. When such structures and transactions happen at a cross-country level, the lack of free information flow hinders monitoring and enforcement as well.”
The market regulator also said companies and their boards ought to take a proper and prudent call on what was a material event and what was not and disclose accordingly. “Under Sebi regulations, listed entities are required to make disclosures of material events to the stock exchanges. In order to facilitate clarity, Sebi has provided a list of events which are deemed to be material. Further, the events which ought to be disclosed based on the company’s materiality policy have also been enumerated. However, it is practically impossible for a regulator to list out all possible material events for a company,” Tyagi added