<br>SEBI had received a preliminary report dated November 22, 2019, from NSE, containing its observations of the inspection of KSBL.
It was observed in the NSE-IR that KSBL was raising funds by pledging client securities and diverting the funds raised to related entities.
The SEBI order said that a sample fund trail exercise was undertaken by the Forensic Auditor of the bank statements of KSBL, and it was observed that there were transactions from the bank accounts earmarked as ‘client bank accounts’ by KSBL to the "own bank accounts" of KSBL.
It was also noted that such funds were, in turn transferred to the Group Companies of KSBL.
Securities of clients who had no negative balance (i.e., zero or credit balances) were also pledged by the Noticee. These securities were transferred to KSBL margin/beneficiary accounts without obtaining consent from the clients. Furthermore, KSBL also did not follow the stock lending and borrowing mechanism to borrow stocks from clients, SEBI order said.
It is, however, observed that KSBL had pledged client securities amounting to Rs 2,700 crore beyond September 30, 2019, which is a violation of the provisions.
Further KSBL, by pledging the securities of the clients in the manner described above and continuing to do so even after a specific direction by SEBI prohibiting such pledging of securities of clients has violated the Circular dated June 20, 2019.
It is noted from the records that as on November 22, 2019, KSBL had not settled funds to the extent of Rs. 527.18 Crore and securities worth Rs 2,862.05 Crore, which were returnable to its clients, the order said.
It is noted that out of the additional borrowings of Rs 1,531.90 crore, during the period April 1, 2019 to September 30, 2019, Rs 1,228.36 crore was given as loan/advances/investments to Group Companies (Rs 428.36 crore was given as advances for investment in subsidiaries and Rs 800 crore was given towards loans/receivables from subsidiaries).
The FAR also records, based on an analysis of the total inflow/outflow between KSBL and its Group Entities, that an net amount of approximately Rs 1,120 crore was transferred from KSBL to its various Group Companies from FY 2017 till October 19, 2019, the order said.
KSBL had not reported six own bank accounts (stock broker-own accounts) to stock exchanges as required under the Circular dated September 26, 2016. It is also noted from the FAR that KSBL had credited funds raised by pledging client securities to these six own bank accounts.
NSE had undertaken a sample analysis of the funding provided to KSBL’s top 25 debit balance clients, and it was noted that KSBL had provided funding for 13 of the said 25 clients.
The Noticee, by funding the positions of these clients, has compromised its risk management procedures and contravened the provisions of the Circular dated September 26, 2016, the SEBI order said.
(Sanjeev Sharma can be reached at Sanjeev.firstname.lastname@example.org)
–Ajit Weekly News<br>san/ksk/
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