There is a big crisis of confidence brewing in the stock broking space after SEBI imposed a ban on Karvy Stock Broking from taking on new clients over alleged misuse of clients' securities. The reports of Karvy Broking's possible default sent jitters across the investor and banking community.

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This comes after defaults of several brokerage firms like Fairwealth, BRH Wealth Kreators, Guiness, Kassa Finvest, and Ficus Securities, which had cost the customers dearly.

Expert says this

It has been pointed out that one of the chief causes of these default is that the regulators, clients, customers and investors have no access to actual related party and counterparty transactions carried out by the brokers.

"Currently, brokers are required to disclose their proprietary trading status to the exchanges and Sebi. However, transactions with related parties are nowhere captured in the scheme of things, except at the MCA. In any case, regulators, clients, customers and investors have no access to actual related party and counterparty transactions carried out by the broker," said Jimeet Modi, Founder & CEO, Samco Securities, as per an IANS report.

He added that there is no framework for approval or processing of related party transactions like that is required in the Companies Act, 2013. Had these brokers disclosed that they had dealings with related parties, exchanges and auditors would have taken note of such dealings to investigate further and could have identified defaults much earlier.

Karvy Stock Broking: CLARIFICATION

However, Karvy Stock Broking has clarified that the Sebi order in no way prevents it from continuing to transact business on behalf of existing clients as per their instructions and in furtherance of the investors' best interests.

The company has also clarified that the restriction on new clients is only for a 21-day period, "subject to us submitting the clarifications and stating our position".

What do SEBI regulations say?

As per SEBI regulations, a broker cannot keep shares of a client for more than 24 hours after purchase in the pool account of the broker. Stiff Penalties are supposed to be imposed in such instances.