SEBI Suspends Karvy Broking For Breaking Rules; Will 95,000 Customers Get Their Shares Back?

On Monday, The National Securities Depository Ltd (NSDL) has transferred the majority of shares owned by clients of Karvy Stock Broking back to their Demat accounts after a directive from Sebi, according to the sources.


How Did This Happen?

This move of NSDL, reassured 90% of Karvy clients, shuts out lenders from accessing client securities pledged with them, unless the appellate tribunal reverses the transfer.

The NSDL informed that they had transferred the securities into the accounts of clients who had paid in full for their securities based on an order by the Securities and Exchange Board of India (Sebi).

What Did SEBI Order To Karvy?

On 22 November, SEBI ordered, Karvy illegally pledged client securities with lenders and raised money, some of which was diverted to its real estate business.

According to this order, Karvy is barred from signing up new clients and stopped lenders from accessing the pledged shares. 

Bajaj Finance is one of the lenders affected by the Sebi order as it claims to have lent ?345 crore to Karvy.

NSDL’s move is significant as the depository has transferred securities worth ?2,013.77 crore back into the accounts of 83,806 clients, which is over 90% of the estimated bank exposure. (Reference)

Earlier on Friday,  95,000 clients were awaiting payouts from Karvy NSDL’s. But still, around 11,000 clients are awaiting for payout, including cash payout, from Karvy.

Who Will Get Affected By This NSDL’s Move?

Tushar Ajinkya, the senior partner at law firm ELP said “This move may lead to more litigation as it seems that NSDL’s move to transfer securities to clients’ accounts was done in the absence of any specific Sebi directive. In transferring these securities, the depository seems to have ignored the third party lien marked on such securities. By doing so, the sanctity of the pledges appears to have been diluted,”.

While Bajaj Finance’s SAT petition brought an interim restriction on transferring shares to clients’ accounts. 

On the other hand, Rafique Dada, assisted by Anubhav Ghosh, Partner at Law Point, and also Sebi representative proclaimed that SAT cannot give relief as the relevant parties—NSE and NSDL—have not been included in the case. 

What Could Be Expected In The Future?

The Sebi directive has frightened the lenders, now they are gearing up for a legal battle. 

Bajaj Finance was the first lender to plea in SAT on Monday. While other lenders including ICICI Bank, HDFC Bank and IndusInd Bank are expected to approach SAT soon.

On the other hand, the Karvy Broking’s clients have the option to either square off their positions in the derivatives segments or sell their stocks or migrate to other brokers. Reference)

While other exchanges are working to remove the hurdles that Karvy Clients could face.

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