SEBI Fines Rs. 1.50 Lakh on Karvy Capital for Violating Disclosure Norms

SEBI Fines Rs. 1.50 Lakh on Karvy Capital for Violating Disclosure Norms

The Securities and Exchange Board of India (SEBI) has imposed a penalty of Rs. 1.50 lakh on Karvy Capital Ltd (KCL) for failing to make timely discloses in the matter of non-convertible debentures (NCDs) issued by Utkarsh Small Finance Bank Ltd (USFB).

A Show Cause Notice (hereinafter referred to as “SCN”) dated March 13, 2023 was issued to KCL (hereinafter referred to as ‘Noticee’).

SEBI had examined the issuance of NCDs by USFB through private placement basis. During the examination, it was observed that KCL in capacity of NBFC had structured the NCDs of USFB and charged fees from USFB.

On the basis of examination, SEBI observed that KCL in capacity of NBFC structured the NCDs for USFB for which it received an advisory fee of Rs. 98,55,000. Thereafter, KCL in capacity of PMS subscribed to 2500 unsecured NCDs of Rs. 1,00,000 each on behalf of its clients on 11 July, 2018 amounting to Rs. 25 crores and transferred the same to its 355 PMS clients on 20 July, 2018. Therefore, there was an alleged inherent conflict of interest in the dual role played by KCL as a structurer of the deal and also as an investor on behalf of their clients through its PMS arm.

In the Disclosure document dated February 2018, KCL had disclosed to its clients about buying securities from its NBFC arm at a price as may deem fit by the PMS, the disclosure does not mention any thing about the role and the alleged conflict of interest.

However, subsequent to query from SEBI, disclosure document was amended on April 2021 detailing about the role of NBFC division in structuring the securities and that PMS Division may buy the securities of issuer companies wherein NBFC division is involved in such structuring and about receipt of payment from the issuer which could be structured as an advisory fee, discount on such debentures/ securities.

The Adjudicating Officer (AO) Barnali Mukherjee explained that, as per Clause 3 of Schedule III of SEBI (PMS) Regulation, 1993, the portfolio manager shall avoid any conflict of interest in his investment and in case any conflict of interest has arisen then the Noticee shall disclose to the clients, possible source of conflict of duties and interests, while providing unbiased services.

While averting to the disclosure made by the Noticee in 2018, SEBI noted that Noticee had disclosed that Karvy Capital as discretionary portfolio manager may buy the securities from Karvy Capital limited (NBFC), however, the disclosure document of KCL in 2018 to its clients about buying securities from its NBFC arm at a price as may deem fit by the PMS had not indicated the advisory fees received by the entity in capacity of NBFC for structuring NCDs of USFB and conflict of interest involved before the acquisition of such securities on behalf of its PMS clients.

Therefore, SEBI observed that the disclosure made in February 2018 was incomplete and inaccurate and did not disclose to the client’s source of conflict of interests.

The AO further found that it was very clear by the disclosure that it did not inform investors about the conflict of interest involved, which would enable the investors to take informed decision.

The SEBI noted that, in reply to the SCN, vide reply dated 6 April, 2023, Noticee had submitted that in the capacity of 'Discretionary Portfolio Manager', it can exercise any degree of discretion as to investment of funds and management of portfolio of securities of the clients.

However, the AO opined that the discretion can be exercised while investing in securities and not for not providing adequate disclosures and deriving benefit out of its activities.

“In view of the same I observe that the Noticee as a portfolio manager did not exercise its role prudently and in compliance of the regulation and thus violating the various provisions of SEBI (PMS) regulation, 1993,” SEBI ruled.

Accordingly, SEBI then imposed Rs 1.50 lakh penalty on Karvy Capital for failing to make timely disclosures in the issue of NCDS of USFB.