The Karvy Scam

 The Karvy Scam

The story so far: On November 22, the Securities and Exchange Board of India (SEBI) passed an ex parte ad interim order against Karvy Stock Broking, a Hyderabad-based firm, prohibiting it from taking new clients in respect of its stock broking activities. In view of the recent developments in the securities market, the National Stock Exchange issued an 11-point advisory to investors on how to keep stocks safe.

How many customers does Karvy have?

Karvy Stock Broking has more than a million retail broking customers and executes over two lakh transactions almost daily on behalf of its clients. The broking firm has been in the news for the last few weeks as some of its clients complained of delayed payouts. Typically, a person should get the money in his account on the third day of the transaction but some clients alleged that they did not receive the money after more than a week of executing the trades.

Why was the payout delayed?

The broking firm had initially said the delay in payouts was on account of technical issues, but according to a preliminary probe by SEBI and the NSE, the late transfer was on account of alleged misuse of client securities. According to the SEBI order issued on November 22, the broking firm credited funds generated by pledging client securities into its own account. SEBI has barred Karvy Stock Broking from signing new clients. Further, an amount of ₹1,096 crore was transferred from the broking outfit to its group entity Karvy Realty between April 2016 and October 2019. Incidentally, appeals filed at the Securities Appellate Tribunal (SAT) further reveal that the broking firm raised funds from entities such as Bajaj Finance, ICICI Bank, HDFC Bank and IndusInd Bank by pledging client securities. For instance, Karvy Stock Broking owes more than ₹300 crore to Bajaj Finance. As per the lenders, Karvy Stock Broking had even given an undertaking that the securities that were being pledged were its own and not of the clients.

What happens to the affected clients?

Most of the affected clients have got their shares. While it is estimated that a total of around 95,000 clients of Karvy Stock Broking have been affected, the depository has already transferred the securities of nearly 83,000 clients from the broking firm’s account to the respective client accounts. The rest of the clients will have to wait since SAT has put a stay on any further transfer of securities from Karvy’s account to client accounts. This directive was issued based on the appeals filed by the lender entities, Bajaj Finance, ICICI Bank, HDFC Bank and IndusInd Bank, wherein the lenders argued that since these securities were pledged with them, they have a right on the shares. SAT has told SEBI to give the lenders an opportunity for a hearing and then pass an order by December 10.

What is the current status?

The Bombay Stock Exchange and the NSE have suspended the broking membership of Karvy. The NSE is conducting a forensic audit to ascertain further details regarding alleged misuse of client securities. Karvy Stock Broking filed an appeal at SAT to challenge its suspension, but the appeal was dismissed with Karvy being directed to file an appeal with the NSE. The coming week would see the regulator decide on the appeal filed by the lenders from whom Karvy Stock Broking raised funds by pledging client securities. The capital market watchdog will take further action against Karvy Stock Broking as well since the earlier order was only an ex parte interim order.

What is the way out for investors?

While clients of Karvy Stock Broking have obvious reasons to be worried, the SEBI order has clearly stated that the broking firm will not be able to further misuse clients’ securities even if it has the power of attorney as the depositories have been given clear instructions in this regard. More importantly, most of the affected clients have already got their securities in their respective accounts. Clients of Karvy Stock Broking, however, should ensure that all their holdings are being reflected in their demat accounts, say market experts. This can be easily done by logging into the demat account and checking the portfolio. If an investor is yet to receive the payout for a trade executed more than 3-4 days back, it is better to approach the stock exchanges — the Bombay Stock Exchange or NSE — as they have an in-house dedicated investor grievance redressal mechanism to deal with such cases. Also, since the broking licence of Karvy Stock Broking has been suspended, its clients will have to switch the account to another broking firm, which can be done easily.

Courtesy: The Hindu