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Current Affairs

The Karvy suspension case

Date: 26 November 2020 Tags: Miscellaneous

Issue

The National Exchange has expelled Karvy Stock Broking Limited (KSBL) from membership of the exchange for non-compliance with regulatory mechanism.

 

Background

The SEBI had banned KSBL from taking fresh business for allegedly misappropriating money and securities belonging to investors.

 

Details

  • The case pertains to KSBL transferring securities of clients unauthorized into one of its Demat accounts by misusing Power of Attorney given by its clients.

  • SEBI moved against Karvy for violating norms and pledging shares of its clients to raise money in the capital market to divert it to its real estate arm.

  • Money lying in Depository Participant account belongs to the respective clients and can be pledged to meet obligations of respective clients. KSBL did not have legal right to pledge the shares.

  • While customers are looking at the siphoning of their money by Karvy, SEBI has been investigating similar offences by other brokering firms.

 

Securities

  • The term "security" refers to a fungible, negotiable financial instrument that holds some type of monetary value.

  • An equity security represents ownership interest held by shareholders in an entity (a company, partnership, or trust), realized in the form of shares of capital stock, which includes shares of both common and preferred stock.

  • A debt security represents borrowed money that must be repaid, with terms that stipulate the size of the loan, interest rate, and maturity or renewal date.

 

Power of attorney

  • A power of attorney (POA) is a legal document giving one person (the agent) the power to act for another person (the principal).

  • The agent can have broad legal authority or limited authority to make legal decisions about the principal's property, finances or medical care.

  • The power of attorney is frequently used in the event of a principal's illness or disability, or when the principal can't be present to sign necessary legal documents for financial transactions.

 

Capital market

  • Capital markets are venues where savings and investments are channelled between the suppliers who have capital and those who are in need of capital.

  • The entities that have capital include retail and institutional investors while those who seek capital are businesses, governments, and people.

  • Capital markets are composed of primary and secondary markets. The most common capital markets are the stock market and the bond market.

  • Capital markets seek to improve transactional efficiencies. These markets bring those who hold capital and those seeking capital together and provide a place where entities can exchange securities.

 

SEBI

  • The Securities and Exchange Board of India (SEBI) is the leading regulator securities markets in India.

  • SEBI has wide-ranging regulatory, investigative, and enforcement powers, including the ability to impose fines on violators.

  • SEBI is run by a board of directors, including a chairman who is elected by the parliament, two officers from the Ministry of Finance, one member from the Reserve Bank of India, and five members who are also elected by the parliament.