TaxTMI 
TaxTMI 
2019 (12) TMI 477
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....s by KSBL. NSE has also stated that detailed 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....
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....ay 31, 2019. Further, Karvy has also transferred excess securities to 6 out of these 9 related clients to the 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 MAN....
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....ties 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 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....
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....v) 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 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 accoun....
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....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 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 ....
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....ities 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' 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/....