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Brokers cannot misuse client securities, says Tyagi

Karvy wasn’t allowed to do what it did

The Securities and Exchange Board of India (SEBI) has taken a serious view of the Karvy issue and said that the stock broking arm of the Hyderabad-based financial services entity indulged in activities that it was ‘never allowed’ to do.

“The regulations are very clear on what brokers can do with client securities,” Ajay Tyagi, Chairman, SEBI said while addressing the media on the sidelines of Organisation for Economic Co-Operation and Development (OECD) Asian Round Table on Corporate Governance here.

“The regulations were made further clear in June 2019. So, if brokers continue to misuse client securities, it cannot be allowed,” he said.

The latest salvo from the SEBI Chairman comes close on the heels of the regulatory directive last week that barred Karvy Stock Broking from signing new clients for alleged offences related to misuse of client funds.

“What is basically never allowed was being done,” he added, while referring to the circular issued in June that stipulated that a brokerage cannot transfer or pledge client securities with banks or financial institutions to raise funds for itself.

“It cannot be anyone’s case even if these instructions were not so explicit that they can use clients’ securities for doing something (of) their own... This is a very basic thing that cannot be allowed,” he said. Apart from barring Karvy Stock Broking from signing new clients, the capital markets regulator also directed depositories not to act upon instructions by the broking outfit to transfer any client securities even if there exists a power of attorney in favour of the brokerage.

On a different note, the SEBI chief said that while India had one of the strongest definitions of ‘independence’ in terms of independent directors in its listing regulations, their conduct and decisions were quite often questioned.

“... the concerns of independent directors not being truly independent, especially in promoter-dominated companies continue and for the right reasons. While such directors meet the regulatory requirements on paper, their independence in conduct and decisions are often under a cloud,” said Mr. Tyagi in his speech.

He added that the capital market regulator was also looking at “improving the existing norms on related party transactions.”

Separately, rating agency ICRA downgraded the rating of long-term fund-based securities issued by Karvy Data Management Services, while withdrawing the rating of its non-fund based securities.

“The rating of ₹370.59 crore long-term fund-based/non-fund based securities is driven by an unconditional and irrevocable guarantee given by Karvy Data Management Services Limited’s (KDMSL) parent entity KSBL. The ratings on the instruments of Karvy Stock Broking Limited (KSBL) were downgraded on the basis of a SEBI enforcement order. The order is expected to impact KSBL’s operations negatively, which, in turn would affect the debt repayment capacity of KSBL,” stated a release by ICRA.

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Printable version | Feb 27, 2020 2:06:46 AM | https://www.thehindu.com/business/brokers-cannot-misuse-client-securities-says-tyagi/article30099504.ece

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