In the past few years, defaults by stockbrokers such as Fairwealth, BRH Wealth Kreators, Guiness, Kassa Finvest, Ficus Securities and now Karvy Stock Broking have led to heavy losses for investors and customer for no faults of theirs.
On Friday, 22nd November 2019, SEBI (Security and Exchange Board of India) banned Karvy Stock Broking Ltd (KSBL) over client defaults worth Rs.2,000 Cr. SEBI banned Karvy from taking on new clients and executing trades for existing customers.
What is Karvy Stock Broking Fraud?
Karvy Stock Broking is one of the largest brokers in India in terms of clients accounts. According to the data released by NSE, Karvy had around 2.5 Lakh clients as on October 31, 2019. Investors complained to government as Karvy delays broking payouts
• Earlier this year, concerns are being raised about the financial problems at Karvy Stock Broking. Several investors had complained that payouts by the broking firm were being delayed. • Investors across the country have complained to the Prime Minister’s Office (PMO), Finance Ministry and SEBI, seeking their payouts. • It was clearly suggesting that Karvy was facing a liquidity crunch and was unable to make payments to its clients. • NSE had also received complaints from investors about irregularities by Karvy relating to their demat accounts.
What Karvy Did?
1. Karvy Stock Broking pulled out shares from its clients’ demat account which were inactive. 2. It transferred those shares to the demat account controlled by it (Karvy). 3. Then it pledged those shares with banks and raised funds. 4. Karvy then transferred these funds/money to its Real Estate arm, named Karvy Realty. 5. However, Karvy failed to return those shares to its clients from whose demat accounts it had pooled the shares at the beginning.
Details of Charges & Actions against Karvy Stock Broking Charges :
• NSE reported that Karvy misused the Power of Attorney given by its clients. It sold client securities in the market via entities it controls and thus used the funds for its own purposes.
Actions taken till date:
• NSE has appointed a forensic audit of Karvy Stock Broking’s books to investigate the extent of misuse of clients’ demat account for its own purposes. • SEBI banned Karvy Stock Broking from taking on new clients and executing trades for existing customers. • Depositories – NSDL and CDSL are asked not to act upon instructions by Karvy on the basis of Power of Attorney (PoA). • Also, Depositories asked to monitor the movement of securities into and from depository participant accounts of Karvy’s clients. • Thus, SEBI had directed Exchanges and Depositories to initiate disciplinary actions against Karvy.
What Precautions the Retail Investors Should Take?
Regulations in India have evolved fast and with every crisis, the markets have become more robust and transparent. Broker debacles like the current one will be averted in future if and only if related party transactions are adequately disclosed and ringfenced. More importantly, disclosures should also be made to the clients so that they become aware and can make an informed decision in their own interests.