Karvy had unauthorisedly sold pledged client shares via off-market transfer and transferred Rs 2,000 crore to its group company Karvy Realty in violation of Sebi rules.
- George Mathew
Banks and finance companies have a Rs 1,415-crore exposure to Karvy Stock Broking, which was banned by the Securities and Exchange Board of India (Sebi) on Friday for default of Rs 2,000 crore to clients.
Karvy had unauthorisedly sold pledged client shares via off-market transfer and transferred Rs 2,000 crore to its group company Karvy Realty in violation of Sebi rules. ICICI Bank has the maximum exposure of Rs 875 crore, which was created only on October 1, 2019. HDFC Bank has an exposure of Rs 195 crore, IndusInd Bank Rs 105 crore, DCB Bank Rs 55 crore and Axis Bank Rs 85 crore, according to banking circles.
Hundreds of investors who have accounts with Karvy and yet to receive money from the firm have complained to Sebi and tweeted about the fraud committed by the broking firm.
The crisis at Karvy has come close on the heels of the RBI superseding the board of DHFL and initiating the bankruptcy proceedings for recovery of around Rs 84,000 crore with banks accounting for over Rs 38,000 crore of the debt. “After IL&FS, DHFL and PMC Bank, now Karvy also … financial sector woes are continuing,” said a bank official. “It’s one of the largest brokers and registrars. This is a reputation loss for the market. Is investors’ portfolio secure with brokers? Who to trust?” tweeted an investor. “Even with all the regulations, inspections and monitoring, scams of larger proportion keep on happening,” said another investor.
The National Stock Exchange (NSE), which submitted a report to the Sebi, observed that KSBL misused power of attorney given by its clients. “KSBL has sold client securities in the market in disguised manner through own controlled entities and used the funds for its own purposes. KSBL in order to hide its misdeed has not even reported the DP account (No. 11458979) in the submissions made by it to the NSE from January 2019 to August 2019. It is only during inspection by NSE, this account came to the notice,” Sebi said in its ex parte order banning Karvy Stock Broking. KSBL transferred a net amount Rs 1,096 crore to its group company Karvy Realty between April 2016 and October 2019.
The NSE report found that there are numerous transactions in the DP account whereby securities of the clients have been moved. Securities of clients received in pay out are transferred from the pool account to this account and also securities lying in the demat account of the clients are also transferred into and from this account misusing power of attorney given by the client, Sebi said.
According to Sebi, the securities lying in the DP account actually belong to the clients which are the legitimate owners of the securities. “Therefore, KSBL did not have any legal right to create any kind of pledge on these securities. Even if the client securities were pledged, it should have only been for meeting the obligation of the respective clients which was not observed in this case,” Sebi said.
Hyderabad-based C Parthasarathy is the chairman and managing director of the diversified financial services Karvy group. “Parthasarathy — CP as he is better known in the industry — has the uncanny knack of staying ahead of the curve and the foresight to spot opportunities that seem invisible on the horizon for the others. Karvy’s entire history is a case study of turning adversity into opportunity. CP is a chartered accountant by qualification, whose entrepreneurial energy drove him to co-found Karvy in 1983 with a less-than-modest capital of Rs 150,000,” says the Karvy website.