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Explained: What is the case against Karvy Broking Limited? What next for its clients?

Stock exchange officials say all the existing clients of KSBL would have either got their securities back and got it transferred to another brokerage firm or would have received the value of their securities into their bank accounts.

By: ENS Economic Bureau | New Delhi | Updated: December 1, 2020 12:52:12 pm
The case pertains to Karvy unauthorisedly transferring securities of clients into one of its Demat accounts by misusing the PoAs (Power of Attorney) given by its clients.

The National Stock Exchange Monday declared Karvy Stock Broking Limited (KSBL) as a defaulter for non-compliance with various regulatory provisions of the bourse and also expelled it from the membership of the exchange. Exactly, a year ago on November 22, the Securities and Exchange Board of India (Sebi) had banned KSBL from taking fresh business for allegedly misappropriating money and securities belonging to its investors in order to fund its real estate arm, Karvy Realty.

While Sebi had initially estimated that Karvy had transferred Rs 1,096 crore to its real estate business, last week the National Stock Exchange said that funds and securities worth Rs 2,300 crore belonging to about 2.35 lakh investors of KSBL have been settled so far. NSE also said that in coordination with other market infrastructure institutions and under the guidance of Sebi, it transferred securities to respective clients, invoked bank guarantees deposited with clearing corporations and liquidated securities held by Karvy Group companies. 📣 Express Explained is now on Telegram

What is the case?

The case pertains to Karvy unauthorisedly transferring securities of clients into one of its Demat accounts by misusing the PoAs (Power of Attorney) given by its clients.

In November 2019, when the case came to light, Sebi moved against Karvy for violating norms, including transferring client shares to itself and pledging client shares to raise money, which it diverted to its real estate arm. Many of Karvy’s over 2.40 lakh clients had complained to the regulator about money and securities not coming to their trading accounts. Karvy allegedly misused client accounts without informing them, or reporting to the depository or the stock exchange.

Securities lying in Depository Participant (DP) accounts belong to clients and can only be pledged to meet the obligations of the respective clients and KSBL had no legal right to create any pledge on those securities.

In its report submitted to Sebi, the NSE had then said that KSBL misused the power of attorney given by its clients to clandestinely sell client securities through entities controlled by it, and used the funds for its own purposes.

To hide this, KSBL did not report the DP account (No. 11458979) in its submissions to the NSE from January to August 2019 and this was detected only during inspection, the NSE said.

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How much money was involved?

The Sebi order in 2019 said that a net amount of Rs 1,096 crore was transferred by Karvy Stock Broking to Karvy Realty. However, as per the latest figure released by NSE last week, the exchange had settled that funds and securities worth Rs 2,300 crore belonging to about 2.35 lakh investors of KSBL. Sources say some amount may still be there to be settled because of disputes but majority of the amount has been settled.

While customers were looking at the stock exchanges for the money and securities allegedly siphoned off by Karvy from their accounts, Sebi started investigating similar diversions of funds from clients accounts by other broking houses.

What happens to the clients?

As NSE has now expelled KSBL from the membership of the exchange and Sebi had banned the firm from taking fresh business, the exiting clients can’t trade through KSBL. Stock exchange officials say all the existing clients of KSBL would have either got their securities back and got it transferred to another brokerage firm or would have received the value of their securities into their bank accounts.

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