In a major order with regard to the IPO scam of 2003-05, SEBI has barred Karvy Stock Broking Ltd (KSBL) from taking up new assignment or launching new schemes for six months in respect of its role as a stock broker.

However, this order would not be given effect for a period of four weeks from the date of its receipt by KSBL, as per a direction of the Securities Appellate Tribunal (SAT).

In a case involving large-scale irregularities in as many as 21 IPOs during 2003-05, SEBI has found that KSBL “failed to maintain high standards of integrity and further indulged in manipulation and malpractices and thereby violated the code of conduct” specified in its Broker Regulations.

The six-month prohibition order would also apply to contract or launch of a new contract by KSBL, while it would also not be allowed to take new clients or customers during this period in respect of its stock brokerage business.

In his order dated March 14, SEBI’s Whole Time Member Prashant Saran said, “I note that while the Enquiry Officer has exonerated KSBL from the charge that it is not a fit and proper entity, the Enquiry Officer has recommended that the certificate of registration of the noticee as a stock broker be suspended for a period of three months. As stated above, in a case where there has been widespread market abuse, the role of one entity should not be seen in isolation and that the collective roles and activities of all the entities concerned should be seen. I also note the submission that the noticee was restrained from indulging in proprietary trading for a period of 14 months. On considering the totality of the facts and circumstances, the interest of securities market, the market participants and my observations/findings and the restrictions on proprietary trading already suffered by the noticee, I am of the considered view that the following order would meet the ends of justice,” he added.

During the hearing, KSBL submitted that the alleged irregularities occurred in its Ahmedabad Office and there were no findings in respect of other branches and that all their other branches had been conducting their business in compliance with the rules, regulations laid out and therefore any restraint on the entire operations would not be proper.

“In this regard, it needs to be noted that the certificate of registration granted to a stock broker is for his stock broking business and therefore any violation or misdemeanour on its part would attract penalty, if required, against its business as a whole. Given the large scale of abuse of the market and the role of the entities of the Karvy Group including the noticee, as discussed above, I do not find it appropriate to only restrain the stock broking business of the noticee in a particular branch,” Mr. Saran said in his order.

In its 35-page order, SEBI observed that KSBL “played an active role in aiding and abetting key operators in their devious scheme of cornering of shares”. The regulator also termed as “fallacious” the submission made by the brokerage firm that it did not cause loss to the investors and did nothing to hurt the integrity of the market.

The case relates to an alleged nexus Karvy had with some key operators in facilitating “their game plan of cornering of shares in the various IPOs which were meant for the retail category and the sale of those shares”.

“Further, on noticing the various activities of the concerned entities of the Karvy Group including the noticee and the manner in which their activities and roles were complemented and supplemented by each other, it can be said that the noticee had an active participation with the other intermediaries in the cornering of shares in the IPOs. This leads to a strong presumption that Karvy Group entities acted in close coordination and the whole group should be viewed as one, irrespective of the separate legal identity of different entities,” the order noted.

In its investigation into IPO scam, SEBI found that many individuals and entities had opened various demat accounts in fictitious (benami) names and made large number of applications in the IPOs in the category of retail investors (each of the applications being of small value as to make it eligible for allotment under the retail category).

These key operators were found to have cornered or acquired the shares issued in the IPOs by using these fictitious accounts. On allotment of shares under retail category, the same were transferred to demat accounts of the key operators who subsequently transferred the shares in off-market to ultimate beneficiaries who were the financiers in the IPOs.

The investigations prima facie observed that the Karvy Group — comprising of KSBL, Karvy Consultants Limited, Karvy Computershare Private Limited, Karvy Securities Limited and Karvy Investor Services Limited — had allegedly assisted, aided and abetted the key operators in cornering the shares issued in the IPOs.

SEBI passed various ex-parte interim orders between December 2005 and April 2006 in this case, wherein directions were issued against various entities including those of Karvy group. Further investigations were conducted thereafter and show-cause notices were issued and a common Final Order was passed in June 2007.

Three karvy entities, including KSBL subsequently appealed before the SAT, which asked SEBI in June 2008 to pass three separate orders against three separate orders against them, while giving a four-week time for orders to come into effect.

In the meantime, KSBL also sought to settle the case through SEBI’s consent mechanism, but the plea was rejected.

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