A ban by market regulator Securities and Exchange Board of India (Sebi) on Karvy Stock Broking from taking on new clients and executing trades for allegedly misusing client securities has unnerved the country's retail investors.
Sebi barred Karvy on Friday after a preliminary investigation by the National Stock Exchange (NSE) showed the brokerage pledged and sold some of its client securities to raise funds for its own use, without client authorisation and in violation of new rules.
Karvy said in a statement over the weekend that there was no "mis-utilisation" of client securities.
Some investors are considering a move to big, bank-owned brokerages even if they cost more, according to three financial advisers, bucking a recent trend towards discount brokers.
"Worried clients have been calling me and I've told them they may shift if they are more comfortable with a bigger brokerage," said SR Srinivasan of financial planning firm SriNivesh Advisors, although he said that out of the handful that have called none had yet shifted.
The NSE had been investigating trades at Karvy following several complaints by investors who said the brokerage was not granting fund transfer requests.
The market regulator in June announced a ban on brokers pledging their clients' securities to banks or non-banking financial companies to raise funds.
A total of close to Rs 2,000 crore ($278.67 million) is at stake, according to Sebi, including about Rs 1,096 crore transferred by Karvy to its group company Karvy Realty Pvt Ltd.
The Karvy Group serves 7 crore individual investors and provides investment advice to more than 600 companies, according to its website.
"A lot of people are also worried about their associations with other businesses of Karvy," said Vishal Dhawan, founder of Plan Ahead Wealth Advisors. "Investors may consider temporarily shifting from low-cost brokerages to bank-owned ones."
In its statement, Karvy said that Sebi's order only prevents it from adding new clients and that it had yet stated its position to the regulator.
Karvy did, however, say that while it had started unwinding pledged shares following Sebi's June directive it had not finished the process.
"The whole issue is of outstanding payment to around 150-180 clients of the brokerage," Karvy Group chairman C Parthasarathy told the Hindu BusinessLine daily, adding that about Rs 25-30 crore due to clients would be cleared in less than a fortnight.
($1 = Rs 71.7700)