Market regulator Securities and Exchange Board of India (SEBI) has imposed a total penalty of Rs8 lakh on C Parthasarthy, chairman and managing director (CMD) and Rs4 lakh on Vikas Rajpal, compliance officer of Karvy Stock Broking Ltd, for violating SEBI regulations related to its portfolio management services (PMS-Karvy).
In an order passed last month, Barnali Mukherjee, adjudicating officer (AO) of SEBI, says, "...from the material available on record, it may not be possible to ascertain the exact monetary loss to the investors or clients on account of default by noticees (Karvy Stock Broking, its directors and compliance officer). Further, as per the available records, it is observed that Mr Parthasarthy and Mr Rajpal have not been penalised earlier for any violations of securities laws. However, I cannot ignore the fact that as a director of SEBI registered Intermediary, PMS-Karvy, Mr Parthasarthy and Mr Rajpal were under a statutory obligation to abide by the provisions of the SEBI Act and all the applicable regulations, which it failed to do." (emphasis ours)
In December 2019, SEBI conducted an inspection of PMS-Karvy for a period from 1 April 2018 to 31 March 2019. After finding violations on nine counts in its PMS regulations, the market regulator issued show-cause notices (SCNs) to Mr Parthasarthy and other directors of PMS-Karvy, including Bhagwan Dass Narang, Jyothi Prasad, Ashish Agrawal and Meka Yugandhar. Notice was also issued to Mr Rajpal, the compliance officer of PMS-Karvy.
According to the SCN, PMS-Karvy failed to appoint an appropriately qualified or experienced principal officer. During the hearing, Mr Parthasarthy admitted that PMS-Karvy appointed Mr Rajpal as principal officer and compliance officer on 16 April 2019, despite knowing he was not qualified to hold the post. The CMD contended that it was a temporary arrangement and later PMS-Karvy appointed Sachin Mittal, who possesses adequate experience and qualifications, as principal officer.
However, Ms Mukherjee, the AO of SEBI, observed that Mr Mittal was appointed 13 months after the appointment of Mr Rajpal as principal officer. She says, "(It) is quite a long time duration to call it a temporary arrangement in the interest of investors" and "the regulations do not give any leeway for temporary arrangement."
Replying to the charges of contrary provisions in disclosure documents, Mr Parthasarthy stated that it was an error of inadvertence. "...while acceding to the representations of the clients, inadvertently the concomitant change was not carried out, at the relevant time, in Section 10 of the disclosure documents," he submitted.
"Negligence of PMS-Karvy in carrying out corresponding changes in other clauses of the disclosure document is untenable, especially in view of the fact that the alleged violation was continuing since 2016-17. I note that the contrary provisions were continuing to appear in the Disclosure document, even after the appointment of Mr Rajpal as principal and compliance officer of PMS-Karvy. Such contrary provisions do not give true and adequate information about the fees that will be charged to the clients," the AO noted.
From the transaction statement of the pool securities account of PMS-Karvy, it was observed that, in many instances, PMS-Karvy kept open positions in respect of the allocation of sales or purchases effected in a day. This has also been accepted by PMS-Karvy in its response to inspection observations vide its email dated 9 August 2020.
Mr Parthasarthy submitted that, during the inspection period of one year, there were only two days when the violation occurred, which was unintentional and inadvertent. "I find that the violation occurred on seven days and for more than 40 scrips. PMS-Karvy cannot keep an open position in any circumstances and leverage its position, thus posing risk to its clients," the AO of SEBI says.
Independent directors (IDs) Mr Narang and Ms Prasad, and non-executive directors Mr Agrawal and Mr Yugandhar submitted that no details regarding any of the violations related to the appointment of principal and compliance officer, discrepancies in model portfolio agreement, disclosure document, and open positions in respect of allocation of purchase of securities affected in a day, were informed to them during board meetings or otherwise, as they were not involved in day to day operations of PMS-Karvy.
Regarding the allegation of non-rectification of deficiencies mentioned in the auditor's report, these directors submitted that the whole-time directors had assured that it would be looked into and appropriately attended to and taken care of by the compliance officer and operational team. It was also submitted that information regarding the appointment of Mr Rajpal as the principal officer was not placed before the board, and hence they were not aware of or involved in the appointment.
Accepting the submission, Ms Mukherjee, the AO of SEBI, stated that there was no material available on record to show that these IDs were involved in the active management or day-to-day affairs of PMS-Karvy.
However, the AO found Mr Parthasarthy, the CMD and Mr Rajpal, the compliance officer of PMS-Karvy, guilty of various violations under the PMS regulations. She then imposed a penalty of Rs8 lakh on the CMD and Rs4 lakh on Mr Rajpal.