Karvy is a financial services company in India. Involved in financial services like equity, commodities trading, depository and wealth management services and distribution of other financial products. It has its headquarters in Hyderabad, India. It also has branch offices outside India in Bahrain, Dubai, Malaysia, Philippines, and the United States.
On November 22, the Securities and Exchange Board of India (SEBI) passed an ex parte ad interim order against Karvy Stock Broking, prohibiting it from taking new clients in respect of its stockbroking activities.
What did Karvy do?
In very simple terms, Karvy
- withdrew the securities from the investor’s(client) account.
- consolidated all such securities in their own account.
- pledged these consolidated securities and raised money against them from banks and NBFC’s.
- this money allegedly was used for its real estate company.
For e.g: A has opened a Demat account with Karvy and is holding securities worth INR 50000. Now Karvy debited let’s say INR 5000 worth securities and credited to its own account. Now not only has karvy debited this amount but also raised money against this INR 5000 worth securities from other banks and NBFC’s. This money was credited in Karvy’s account and used to fund its real estate company. Thus, technically investor’s money has been used to fund the real estate arm without their knowledge and consent.
An amount of ₹1,096 crores 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. As per the lenders, Karvy stock broking ltd (KSBL) had even given an undertaking that the securities that were being pledged were it’s own and not of the clients.
KSBL has sold excess securities (securities not available in DP account) to the tune of Rs 485 crore through nine related clients till May 31, 2019. Further, KSBL has also transferred excess securities to six out of these nine related clients to the tune of Rs 162 crore till May 31, 2019.
What is so wrong about all this?
- debiting securities from a client’s account without his agreement is illegal and has been banned by SEBI.
- Pledging of securities from the client’s Demat account has been banned by SEBI, thus making it illegal.
- Karvy also failed to report its bank and Demat accounts to SEBI (a must as per SEBI’s rules).
How can Karvy debit from the investor’s account?
When investors open a Demat account they sign on some papers which they never bothered to read. What they have done is signed a POA (power of attorney) in favor of karvy giving them authority to debit securities from their account and deliver it to the exchange. It is a faster and easier way of doing things in the ordinary course of business. However, Karvy has misused this for its own benefit.
With the fourth week of February drawing to a close, Karvy Stock Broking Ltd (KSBL) has missed yet another self-declared deadline for clearing its client payouts, leaving many of its investors in the lurch.
The beleaguered Karvy Group has now written to investors seeking time till March to clear its dues. But most of them are not hopeful of seeing their money.
But what is even more frustrating for investors from smaller towns is that they have been ditched by their local Karvy agents, many of whom have quit because of non-payment of salaries.
Karvy has breached its promise of clearing dues for the fourth time.
How can SEBI prevent Karvy like incidents?
The latest set of instructions have gone out to the auditors of brokers to pay attention to the pledges, collaterals, disclosures concerning related-party transactions, expense sharing agreements, capital contributions and withdrawals, inter-group exposures so that any such misuse of client’s shares as it happened in the case of Kary can be detected on time and reported. There should be a review of the software/compliance tools to see if improvements can be made to flag any violations.