Karvy Stock Broking Booked for Unauthorised Use of Clients' Money

In a yet another major financial scandal that will certainly hit the stock markets for the modus operandi of misusing clients' funds, the Securities and Exchange Board of India (Sebi) has banned Karvy Stock Broking (KSBL) from taking new client and executing trades.

However, it was earlier reported in media also that the payment defaults occurring in Karvy Stock Broking and its clients filing complaints with the Prime Minister's Office (PMO), the Finance Ministry and Sebi.

Sebi said the unauthorised use of clients' funds creates a serious doubt over the conduct and integrity of KSBL.

This is one of the biggest cases of broker defaults in the equity segment and despite numerous regulations, the fact remains that clients' money and securities were brazenly misused for its own purposes by Karvy Stock Broking.

The defaults are to the tune of Rs 2,000 crore and in an ex-parte order, Sebi has directed that pending forensic audit, KSBL is prohibited from taking new clients with respect to its stock broking activities.

The depositories, i.e. NSDL and CDSL, in order to prevent further misuse of clients' securities by KSBL, are hereby directed not to act upon any instruction given by KSBL in pursuance of power of attorney given to KSBL by its clients with immediate effect, Sebi said.

The depositories shall monitor the movement of securities into and from the DP account of clients of KSBL as DP to ensure that clients' operations are not affected.

"Therefore, there is need for urgent regulatory intervention to prevent further misuse of clients' securities," said Ananta Barua, wholetime member, Sebi, in the order.

Detecting the fraud, the order noted that the securities lying in the aforesaid DP account actually belong to the clients who are the legitimate owners of the securities. Therefore, KSBL did not have any legal right to create any kind of pledge on these securities, the order said.

Even if clients' securities were pledged, it should have only been for meeting the obligation of the respective clients which was not observed in this case.

"Considering the issue of misuse of clients' securities by KSBL in an unauthorised manner, for its own use and purposely not disclosing the DP account no. 11458979, named KARVY STOCK BROKING LTD (BSE) to the Exchanges in their reporting create a serious doubt on the conduct and integrity of KSBL," Sebi said in the strongly worded order.

The NSE on Friday forwarded a preliminary report to Sebi on the non-compliances observed with respect to the pledging/misuse of client securities by KSBL. NSE has also stated that a detailed report in the matter will be submitted shortly.

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.

On subsequent verification, it was observed that securities worth Rs 257.08 crore, pledged on behalf of four clients out of the aforesaid nine clients, were unpledged between June 1, 2019 and August 22, 2019 and securities worth of Rs 217.85 crore was recovered by KSBL from four out of the nine client accounts.

KSBL has also purchased securities in five out of the nine client accounts amounting to Rs 228.07 crore during the period from June 1, 2019 to September 8, 2019. KSBL had undertaken the recovery/purchase of securities to recoup the securities shortfall.

Prima facie, a net amount of Rs 1,096 crore has been transferred by KSBL to its group company, i.e. Karvy Realty Private Limited, between from April 1, 2016 and October 19, 2019.

Further, 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, Karvy had also transferred excess securities to six out of these nine related clients to the tune of Rs 162 crore till May 31, 2019. On subsequent verification, it was observed that securities worth Rs 257.08 crore pledged on behalf of four clients out of the aforesaid nine clients were unpledged between June 1, 2019 and August 22, 2019 and securities worth of Rs 217.85 crore was recovered by KSBL from four out of the nine client accounts.

KSBL has also purchased securities in five out of the nine client accounts amounting to Rs 228.07 crore between June 1, 2019 and September 8, 2019.