By Malini Bhupta & Shritama Bose
The National Stock Exchange (NSE) has appointed EY to conduct a forensic audit into Karvy Stock Broking, following the ex-parte order issued by Sebi last Friday. The markets regulator on Friday banned Karvy from taking new clients and restricted the broker from executing any further trades on behalf of clients.
The market regulator’s order, which was issued on the basis of observations made by NSE in the course of its routine inspection, mentioned a transfer of Rs 1,096 crore to a subsidiary company of Karvy Stock Broking (KSBL) – Karvy Realty. However, Karvy Stock Broking in response has said that the quantum mentioned is incorrect, without specifying the exact amount transferred to Karvy Realty.
Sebi’s Friday order comes in the wake of exchanges carrying out investigations into stock broking companies after discrepancies arose in several instances between holding patterns of client securities disclosed by the depositories and brokers. During the course of the investigations, both NSE and BSE learned that several brokerages had been pledging securities of clients, for which client consent was taken rather surreptitiously through the power of attorney (PoA) agreement.
Investigations carried out by both exchanges (BSE & NSE) found that Karvy Stock Broking is not the only broker to have executed such PoA agreements. Several other brokers too have taken consent from their clients such that their shares could be pledged to raise funds.
According to data available with the ministry of corporate affairs, Karvy Stock Broking has borrowed Rs 1,415 crore from six private banks and financial institutions. Of this amount, more than half is comprised of a Rs 875-crore loan from ICICI Bank. The broking firm owes HDFC Bank Rs 195 crore, IndusInd Bank Rs 105 crore, Aditya Birla Finance Rs 100 crore, Axis Bank Rs 85 crore and DCB Bank Rs 55 crore. On Monday, DCB Bank informed stock exchanges that at present, it has a non-funded exposure of Rs 30 crore to Karvy Stock Broking in the form of bank guarantees issued on their behalf. “The bank guarantees are secured by 50% cash margin in the form of term deposits,” the lender said.
In June 2019, Sebi had issued a circular restricting brokers from pledging client securities to raise finance with effect from August 1, 2019. The regulator also mandated that all existing pledged positions had to be unwound by September 30. Depositories were instructed to share with the exchanges details of securities that were pledged by the broker from client accounts. Karvy Stock Broking put up a detailed explanation on its website underplaying the markets regulator’s order, claiming that the order was an ‘interim’ directive and not a final finding.