The ban on Karvy Stock Broking Limited (KSBL) from taking new clients was justified as the brokerage was indulging in activities that were “never allowed”, Sebi chairman Ajay Tyagi said on Wednesday.
The Securities and Exchange Board of India (Sebi) on Friday last barred KSBL from taking new clients with respect to stock broking activities for the alleged misuse of clients' securities. The ban was enforced after the NSE submitted a preliminary report to the regulator on the non-compliances with respect to the pledging and misuse of client securities by Karvy.
Tyagi said Sebi in June had made its stance “explicit” through a circular and hinted that there was no case for entities to indulge in such practices before that as well.
“What is basically never allowed was being done. It is not that this separation was asked in June,” he told reporters on the sidelines of a Organisation for Economic Co-operation and Development (OECD)-Asian roundtable on corporate governance here. “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.”
He mentioned proprietary trades or investments in other businesses while elaborating on the possible activities that a brokerage may carry out.
“This is a very basic thing which can't be allowed,” he reiterated.
Reacting to the to the ex parte ad interim order, the Karvy group had said that there was no instance of misutilisation of client securities.
Corporate governance
Tyagi said regulators across the globe struggled with the fundamental question of how to ensure compliance of regulatory norms in spirit and not just in letter. He pointed out that there was also a debate over rule-based regulations against the principle-based ones as also on over-regulation versus under-regulation.
“There is a constant worry for regulators that the compliance should not become a mere check-box exercise. Sebi has tried to adopt a mix of principle- and rule- based approach in its listing regulations. While this has helped to some extent, the issue of many companies adopting the tick-box approach on certain aspects of corporate governance remains a matter of concern,” he observed.
”Use of complicated group structures and complex related-party transactions increase the concern on siphoning of funds, money laundering, round tripping etc, while such structures and transactions happen at a cross-country level, the lack of free information flow hinders monitoring and enforcement as well,” he said.
In the 12-page ex-parte interim order, Sebi Whole Time Member Ananta Barua had said there was a 'need for urgent regulatory intervention to prevent further misuse of clients' securities’’. The SEBI had also directed NSDL and CDSL not to act upon any instruction given by KSBL in pursuance of power of attorney given by its clients.
Reacting to the ex-parte ad-interim order, the Karvy group had said that there was no instance of mis-utilization of client securities.
It may be recalled that SEBI had in June this year, said that brokers should not raise funds by pledging the clients securities and it also ordered segregation and reporting of clients stocks and funds.
The SEBI chief said that through the circular, the watchdog had made its stance “explicit”, even as he added that through previous directions as well they were barred from such practices.
``What is basically never allowed was being done. It is not that this separation was asked in June,' he told reporters on the sidelines of the Organisation for Economic Co-operation and Development (OECD)-Asian roundtable on corporate governance here today.
'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,' he added.
