On Friday evening SEBI put out an emergency order ‘partially’ restraining Karvy Stock Broking (KSBL) from doing business.

The order kicked up a storm as KSBL is one of the largest retail brokerage house in India. It was an ‘ex-parte-ad-interim’ order that said KSBL cannot take any new clients, and instructed Depository Participants to not take any instructions from the broker for transfer of client securities, even if they hold power of attorney from clients, unless the securities are backed from full payment from clients. This is tantamount to a virtual halt to Karvy’s client business.

Also read:SEBI bans Karvy Broking for nearly Rs 2,000 crore in defaults

Also read:No misuse of clients’ securities: Karvy

The order has now drawn many critics as it leaves the following crucial questions unanswered:

Forensic audit without an order spelling out the charges

SEBI, in its order, said that it was issuing the order against Karvy “pending forensic audit.” It is now learnt that Karvy is undergoing a forensic audit, and accounting firm EY has been put on the job. Surprisingly, this is a rare case where SEBI has allowed a forensic audit without passing an appropriate order.

Also read:Rise and `fall’ of Karvy: Is rapid diversification source of trouble?

Recent instances show that SEBI issues a well reasoned order against those companies giving out the detail charges which required a forensic audit. But in the case of Karvy, that has not been done. Recent instances where SEBI issued a forensic audit and clearly spelt out the charges in an order include action against companies like Fortis Healthcare, Religare, CG Power and its order against a large number of companies that were declared as shell.

Also, the forensic audit is ordered by SEBI mainly under three circumstances including manipulation of accounts of company, non-disclosure of key financial transactions, siphoning of funds by company promoters or key management. The SEBI order specifies none of these in its order against Karvy, legal experts say.

Which are the SEBI regulations that Karvy violated?

SEBI has passed an important emergency order but does not reveal if Karvy violated any of the key regulations like Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) or any other market manipulation norm.

The order only quotes violation of circulars by Karvy and norms related to conduct of stock brokers.

Does not disclose full NSE report

SEBI order quotes selective part of a probe report by the National Stock Exchange (NSE). Legal experts and former SEBI officials are of the view that the regulator should have put out the full report of the exchange against the broker for the sake of public transparency to know exactly where the matter stood.

SEBI silent on Karvy Commodity

As per SEBI’s new regulations, there is no different treatment now for stock or commodity broker as both segments can be operated by the same entity.

While SEBI has restrained Karvy in equity segment due to questionable transactions, it is silent on Karvy's commodity segment.  Also, SEBI order does not restrain Karvy Broking from liquidating its own assets or selling own shares despite the fact that it has client dues pending.

SEBI has done a limited review of the brokerage, when it should have gone into the group’s inter-personal corporate loans and borrowing. This in the light of the fact that Karvy has pledged client shares and a full review could have brought out more facts.

Experts are even questioning as how SEBI has allowed a broking firm, which involves handling of client money, to remain as the holding company of the entire group.

Delayed action

The NSE report has clearly said that Karvy Broking has been transferring money to real-estate subsidiary since 2016. The SEBI order further said that it has noticed selling of shares by Karvy without client consent for several months. The order quotes precise month since Kravy has been indulging in pledging or transferring of client shares, even in dormant accounts, without taking their consent. In the light of this, what took SEBI to pass an emergency order only now.

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