Karvy’s fraud has no parallels in biz history

Preliminary investigation found that the money found its way to Karvy Stock Broking’s real estate arm — Karvy Realty.

Update: 2020-01-12 00:40 GMT
On November 22, the Securities and Exchange Board of India (SEBI) blocked Karvy from accepting new clients and taking shares in delivery.

Hyderabad: The stock markets have been witness to many scams perpetrated by the Harshad Mehtas and Ketan Parekhs, et al. Most of them were designed to short-circuit the markets or to dupe banks or fool investors. None of these scamsters tried to make money at the expense of their clients. The client’s trust was never misused.

All that changed on November 22, 2019, when capital markets regulator Securities and Exchange Board of India (Sebi) prima facie found that Karvy Stock Broking Limited (KSBL) had pledged the securities of its clients — without any express consent — to raise nearly Rs 2,000 crore for its operations.

This development had no parallel in the history of Indian stock markets and shattered the trust-based relationship between a stock broker and his client.

“KSBL credited the funds raised by pledging of client securities to six of its own bank accounts instead of its client accounts and further has not reported these six own bank accounts to the Exchange, which is mandated under Sebi provisions,” the market regulator had said in its ex parte interim order. Sebi had passed the interim order on November 22 evening without hearing Karvy because of the urgent and serious nature of the case.

Karvy had used the power of attorney (PoA) — which clients give stock brokers to execute their instructions on phone for stock trading — to create unauthorised charge on client securities.

“What is basically never allowed was being done. It cannot be anyone’s case even if these instructions were not so explicit that they can use clients’ securities for doing something (of) their own,” Sebi chief Ajay Tyagi had observed.

Preliminary investigation found that the money found its way to Karvy Stock Broking’s real estate arm — Karvy Realty. Sources claim that the swindled money might have been diverted to repay highly influential high networth individuals (HNIs) whose funds were used to finance real estate projects.

Another of Karvy Stock Broking’s sister firms, Karvy Personal Wealth, uses higher interest payouts as a bait to get its HNI clients to invest in high-risk investment categories like real estate project financing.

The investments marshalled by this particular arm have seen many defaults due to financial woes of the real estate companies after the 2016 demonetisation.

The biggest casualty in this scam were nearly 90,000 individual investors who had invested in stocks through Karvy Stock Broking.  

After prime stock exchanges BSE and NSE suspended Karvy Stock Broking’s trading licence for all segments due to non-compliance with exchange and securities markets rules, Karvy’s existing investors have been unable to square off their derivatives position.

If lenders are allowed to get ownership of the pledged shares, the clients would lose their hard-earned money and would have to file recovery suits for getting their money from a fast-crashing Karvy.

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