It was another big jolt for the market regulator. Three days after it had to backtrack on the ban on Indiabulls [Get Quote], the Andhra Pradesh high court on Tuesday granted an interim stay on a major portion of the Securities and Exchange Board of India directive against depository participant Karvy.

Admitting a writ petition filed by Karvy, the court ruled that the existing investors with the firm were not required to switch to other depository participants.

"Sebi does not have any jurisdiction over moving investor accounts from one depository participant to another and that is the premise of the court ruling today," Karvy's counsel S Venkatramana said.

Interpreting the court's observations, the Karvy counsel said the order allowed the depository participant to open fresh investor accounts.

The IPO Scam: Complete Coverage

Sebi has the option of filing a counter affidavit to vacate or modify the court order. However, the case will come up for next hearing only after June 5, when the court resumes work after summer vacation.

G Anantaraman, whole-time Sebi member who passed the order last Thursday, said the court ruling was an ex-parte order and the regulator would react to it "appropriately." He did not comment on the future course of action by the regulator.

Karvy will file its objections with the regulator tomorrow though it is understood to have met the Sebi member on Tuesday.

Currently, the Karvy group, under its four group companies, employs about 7,000-odd people across 500 branches across the country. The firm has 290,000 investors and 725,000 demat accounts.

Over the last financial year, Karvy Computershare Private Limited, which is the registrar, handled 38 initial public offers out of a total of 50 issues.

Despite its meticulous investigation to unearth the multiple application racket, Sebi has had to eat humble pie after it seemingly overlooked certain vital aspects. The regulator had to modify the order within 24 hours by stating that the ban on market intermediaries pertained only to proprietary accounts of the brokers concerned and not to their clients.

Further, the regulator had to hold back the order against Indiabulls after the firm filed its objection with the regulator.

In its order passed last week, Sebi had banned Karvy DP and Partik DP from the market for their alleged involvement in the IPO scam, and provided a 15-day window for investors to switch out of the two firms.

The regulator found Karvy at fault on three basic counts. First and the most serious was the apparent close linkages between Karvy and the other 24 large-scale alleged manipulators or "master account holders".

In support of its allegations, Sebi had given proof of different financial transactions between Karvy and some of the other involved entities. The Sebi order also said that four out of the 24 alleged masterminds of the scam were either sub-brokers of Karvy or shared the same residential addresses as a few of its top-performing sub-brokers.

Among those that Karvy had direct financial transactions include Roopalben Panchal, SEIPL, Purshottam Budhwani and Manojdev Seksaria. Purshottam Budhwani and Manoj Seksaria figure among its sub-brokers.

"Financial transactions amongst the master account holders as well as between the master account holders and Karvy have been noticed thereby leading to the view that there are strong interlinkages amongst the master account holders as well as between Karvy and the master account holders," Sebi noted.

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