Sebi disposes of showcause notice to Karvy Capital in AIF violation case

Capital markets regulator Sebi has disposed of a show cause notice issued to Karvy Capital Ltd and its key management personnel after finding no violations of alternative investment funds (AIF) rules.

The order came after the Securities and Exchange Board of India (Sebi) examined the matter of Karvy Capital Alternative Investment Trust, and KCAP Alternative Investment Fund, to ascertain satisfaction of 'fit and proper' criteria by Karvy group AIFs registered with Sebi.

Thereafter, Sebi observed certain non-compliances and accordingly initiated adjudication proceedings against Karvy Capital Ltd (KCL) and key management personnel -- Ajit Bhaskaran, Hitungshu Debnath (former director & COO), and K P Jeewan -- for the alleged violations of AIF norms.

 

Thereafter, Sebi issued a show cause notice (SCN) to the noticees (KCL, Bhaskaran, Debnath and Jeewan) on June 7, 2024 for the alleged violations.

In an order passed on January 2, Sebi said Karvy Capital Alternative Investment Trust and KCAP Alternative Investment Fund, along with their sponsor and manager Karvy Capital, were not liable for alleged breaches of the AIF Regulations.

The case centred on Karvy Stock Broking Ltd (KSBL), the parent company of Karvy Capital, which holds nearly 100 per cent holding in the fund manager.

The regulator had earlier found KSBL unfit for the securities market following multiple regulatory violations, including a 2023 order debarring it from accessing the securities market for seven years.

Despite Sebi's requirement that KSBL divest its stake in Karvy Capital within six months of being disqualified, the divestment could not occur due to legal constraints.

These included attachment orders by the Enforcement Directorate, restrictions imposed by the National Company Law Tribunal (NCLT), and the absence of a functioning board at KSBL.

Karvy Capital, in its defence, stated that neither of its AIFs had raised funds or had active investors. It also highlighted steps taken to mitigate concerns, including the surrender of AIF licences.

Further, Sebi acknowledged the firm's compliance with disclosure requirements and its declaration of potential issues regarding its promoter's status under fit-and-proper norms.

The markets watchdog concluded that the firm and its management had not violated market rules, given the circumstances beyond their control.

"I find that for the allegation that noticees had failed to ensure that Karvy Capital alternative investment trust and KCAP alternative investment fund were in compliance with AIF regulations" said Amar Navlani, Sebi's adjudicating officer.

"I find that the allegation that noticees had violated provisions of Code of Conduct of AIFs regulations does not stand established," Navlani said.

Accordingly, Sebi disposed of the show cause notice issued against noticees initiated vide SCN dated June 7, 2024, without imposition of any monetary penalty.