Market regulator Securities and Exchange Board of India (Sebi) in a Friday night banned Karvy Stock Broking Ltd. (KSBL) from taking on new clients after finding alleged client fraud of ₹2,000 crore. This order will come into force with immediate effect.

On Friday, NSE forwarded a preliminary report to Sebi on the non-compliances observed with respect to the pledging/misuse of client securities by KSBL. The exchange’s preliminary report is the result of the limited purpose inspection of KSBL conducted by it on August 19, covering a period from January 1 onwards, Sebi said in an order.

Sebi said Karvy, despite not having any legal rights to create a pledge on these securities and generate funds, did so to the tune of ₹2,000 crore. “Even if the client securities were pledged, it should be (used) only for meeting the obligation of the respective clients,” said Sebi member Ananta Barua in a 12-page order.

Apart from prohibiting the entity from taking new clients in respect of its stock broking activities, the watchdog directed NSDL and CDSL not to act upon any instruction given by KSBL in pursuance of power of attorney given by its clients.

“The depositories shall monitor the movement of securities into and from the DP account of clients of KSBL as DP to ensure that clients’ operations are not affected,” the order said.

Further, the regulator said the depositories and stock exchanges shall initiate appropriate disciplinary regulatory proceedings against KSBL for misuse of clients’ funds and securities as per their respective regulations.

The findings recorded in the order are based on the prima facie examination of facts and prima facie violation of securities law, it added.

Sebi also said the “order does not ipso facto entitle any client of the notice (KSBL) to claim their funds, stocks and securities, which claims are to be taken by such clients with the concerned stock exchanges/ depositories in accordance with their respective bye-laws”.

The directions would be in place pending forensic audit. KSBL has been given 21 days’ time from the date of receiving the order to file its objections or responses if any.

(With input from agencies)