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Telangana High Court dismisses Karvy Stock Broking’s plea challenging SFIO probe [Read Judgment]

Karvy Stock Broking - Taxscan

The Telangana High Court has dismissed two writ petitions moved by Karvy Stock Broking against the Ministry of Corporate Affairs order directing SFIO (Serious Fraud Investigation Office) probe.

The complaints by some of the Karvy customers and reports of defaults, the Registrar of Companies had initiated an investigation in January on alleged fraudulent transactions and sought details of transactions by the securities firm. After a number of complaints, the Government had directed a probe by RoC and SFIO.

The Securities and Exchange Board of India in November 2019 had directed the Karvy group be barred from inducting new customers for unauthorisedly using their funds by pledging and making use for its requirements. The markets regulator had restrained transfer of securities from Karvy depository participant accounts except in cases where there were owners who had made full payment for the securities.

The assistant solicitor general (ASG) of India in the Telangana HC, Namavarapu Rajeswara Rao contended that the RoC recommended investigation after considering Karvy’s submissions and the MCA framed a prima facie opinion for ordering an investigation on the basis of material of alleged fraudulent activities.

It was further contended by the government that the number of group companies involved are under jurisdictions of various ROCs and prima facie raised their loan capital by pledging shares of their clients and diverted the money to group companies using a power of attorney taken from the clients. This is meant to be used only at the time of the client’s direction to sell the securities, with a criminal intent without the knowledge or consent of clients, discrepancies in charge documents in this office with that of the claims of bank revealed in SEBI orders, signing of standalone balance sheet by the continuing auditor and consolidated balance sheet by a different auditor appointed just before AGM on September 30, 2019.

Justice Rajasheker Reddy rejected the argument of counsel appearing for petitioner company, who submitted that the ministry has taken the decision without following due process of law, without proper enquiry and without giving an opportunity to be heard.

The Court observed that the Ministry of Corporate Affairs ordered investigations following information about public elements in the case and dismissed the appeal to quash the proceedings. The court order copy was recently uploaded.

The Court found that RoC has followed the procedures and submitted the report and also other material available on record, was examined by the Oversight Committee, and later investigation was recommended. Due procedure was followed warranting probe and accordingly, the writ petition filed challenging the notices issued in pursuance of the impugned order, were dismissed.

The judge dismissed the two petitions by taking into consideration the submissions of Assistant Solicitor General N Rajeshwar Rao, appearing for the Central government, that the action of the petitioner company has affected the interests of more than 90,000 depositors.

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