Market regulator, SEBI through an interim order on November 22, banned Karvy Stock Broking Limited (KSBL) from enrolling new clients. That apart, the order also prohibits any transactions in client’s account, if executed based on the power of attorney (POA) given to KSBL by its clients.
Partly paid shares of clients held in the demat account named Karvy Stock Broking Limited cannot be withdrawn unless clients make the full payment for the shares. Once the shares are fully paid, it can be transferred to the client’s beneficial account. Other transactions involving movement of shares in and out of demat accounts are however permitted. But the depositories -- NSDL or CDSL – have been asked to closely monitor these transactions.
Apart from the above, the SEBI order has not prohibited any other transactions. But investors are reportedly facing hardships in withdrawing their funds and securities from their respective demat accounts.
According to a personnel at the Chennai branch, these restrictions are temporary due to the ongoing forensic audit. Hence, clients are not allowed to withdraw funds from their trading account until Monday, he added.
It is to be seen if these restrictions are eased by next week, as indicated at the branches. But even if the company keeps up its promise of resuming to business and easing the ‘temporary’ restrictions, it might still not be all hunky-dory for clients.
This is because, though an ex parte-interim order, the SEBI’s ban will continue to prevail until subsequent order is passed by SEBI. KSBL is reported to have appealed to SAT for easing the restrictions on client trades, but the outcome is not yet known.
It may not be in the client’s interest to continue their trading account with KSBL, even after temporary restrictions are eased.
Pack up and leave
There are serious allegations made in the SEBI order. A demat account and six bank accounts of KSBL which were not reported to the exchange. Further, KSBL has misused the POA given to it by its clients, to wrongfully pledge their shares and generate funds for its own use. This apart the report also highlights several other fraudulent transactions including, excess sale of securities worth Rs 485 crore, off market transfer of shares from client accounts and a net amount of Rs 1,096 crores being transferred to one of its group companies-- Karvy Realty Private Limited.
While KSBL has time to respond to SEBI’s order, the fact that SEBI has barred the company from taking new clients in the interim period shows that the regulator is seriously concerned about the risk to investors.
Wish to stay?
Even if the business of KSBL resumes post the forensic audit, the restrictions imposed through the SEBI order are likely to stay.
The SEBI order however does not stop KSBL’s clients from continuing their trade transactions. You can continue to execute your trades online, once KSBL permits you to do so, if you have an electronic or online trading account with KSBL.
But, if you were one of those who traded through phone calls made to your respective relationship manager or dealer, the trades can no longer be executed, since KSBL needs to use the PoA given by clients in such trades.
You can however continue to execute your trades by submitting a physical delivery instruction slip to KSBL after every sale of security.
Partly Paid shares
Clients need to however note that, post the audit, traders will not be able to continue their margin trading (according to the above mentioned personnel). Purchase of shares will only be possible on depositing the full amount upfront in the trading account.
If you have a margin funded trading account with KSBL, the only way to move your shares from KSBL’s demat account to your account, is to make them fully paid up. Following the SEBI’s interim order, the company is currently not authorized to make any other movements from the KSBL account.
However, you can square the position involving partly-paid shares, if you want.
Piece of advice
If you have now turned skeptical of KSBL’s acts and want to trade hassle free, it is advisable to open a new demat account with another depository participant.
To avoid paying taxes, you must close your account with KSBL and transfer all securities to the new account, in your name. If the shares are transferred to any other person, respective taxes shall apply.
Do make sure to include specific dos and don’ts in your POA this time. If the broker facilitates electronic trading and electronic delivery of shares from the demat account, such PoA may not be needed.