Probe into Karvy's 2,000-cr misuse of client funds leads to a Rs10,000-cr marketwide scandel
25 November 2019
Market regulator Securities and Exchange Board of India (Sebi) has initiated a marketwide probe into unauthorised use of client funds by brokers, follong a Rs2,000-cr scandal at leading brokerage Karvy Consultants. Sebi had ordered a refund of client funds by brokers by 31 August, which many of the brokers have failed to meet.
Sources say the issue of brokers indulging in the practice of using clients’ shares is not limited to just Karvy Stock Broking, with over three dozen more brokers under Sebi lens for misappropriating client funds to the tune of Rs10,000 crore.
Sebi has barred Karvy Consultants from taking up new clients and executing trades after a major scandal involving unauthorised use of client funds hit the stock markets.
The Sebi clampdown comes after several brokers missed the 31 August deadline set for returning client funds.Sebi said the unauthorised use of clients' funds creates a serious doubt over the conduct and integrity of KSBL Market players said the issue could snowball into a bigger problem if these brokers are not able to return client money.
Investors had reported Karvy's misuse of client funds in representations to the Prime Minister's Office, the finance ministry and Sebi after several stock brokerd defaulted on returning client funds.
At stake is the integrity of KSBL and other broking firms that vantonly use client funds to indulge in trading activities.
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 continue to be misused by brokers for own purposes.
In order to prevent further misuse of clients' securities by KSBL, Sebi has directed depositories, ie, NSDL and CDSL, not to act upon any instruction by KSBL in pursuance of power of attorney given to KSBL by its clients with immediate effect.
The depositories have vbeen asked to 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 Rs485 crore through nine related clients till 31 May 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 Rs257.08 crore, pledged on behalf of four clients out of the aforesaid nine clients, were unpledged between 1 June 2019 and 22 August 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 Rs228.07 crore during the period from 1 June 2019 to 8 September 2019. KSBL had undertaken the recovery/purchase of securities to recoup the securities shortfall.
Prima facie, a net amount of Rs1,096 crore has been transferred by KSBL to its group company, ie, Karvy Realty Private Limited, between from 1 April 2016 and 19 October 2019.
Further, KSBL has sold excess securities (securities not available in DP account) to the tune of Rs485 crore through nine related clients till 31 May 2019.
Further, Karvy had also transferred excess securities to six out of these nine related clients to the tune of Rs 162 crore till 31 May 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 Rs228.07 crore between 1 June 2019 and 8 September 2019.