What’s the whole Karvy mess up about?


Very recently SEBI (Securities and Exchange Board of India) imposed a ban on Karvy Stock Broking Limited (KSBL) restricting them from acquiring new customers. The broker has been accused of commingling broker and client assets, and misusing clients’ securities worth Rs. 2,000 crore. It has been claimed that the broker may have divulged all this money, and securities to its real estate business. Karvy Stock Broker Limited is among the country’s top 10 brokerage companies with over 2,50,000 customers. The power of attorney over client assets and securities is vested in the hands of the broker. This misuse of power of attorney has been called out before too in the IPO scam.

Role of NSE and BSE

National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are both leading stock exchanges in India. So basically, NSE and BSE are supposed to take care of stock brokers and ensure that they do their work properly. Considering, stock brokers fall under the domain of stock exchange, it is the duty of NSE and BSE to make sure that client assets and securities are safe and not being misused by the stock brokers for solving their own purposes. Since exchanges are the first level regulators, they should have strict routine checks on their members. 

If the brokers try to break the rules, both NSE and BSE should step ahead and take action. In this case, it is difficult to believe that a major broker like Karvy could not be kept under control. The probe report of NSE which has not yet been fully disclosed, shows that Karvy and a few other brokers have been doing the same for months now. Now, who is to be blamed for such a major screw up if not NSE or BSE? 

Role of NSDL and CDSL

The role of NSDL and CDSL is no less. It’s like the last IPO scam has not taught them any lessons. Fake clients accounts have regularly been used by Brokers. Karvy itself, has been using dormant accounts to pledge and un-pledge securities all this while under the nose of NSDL and CDSL. A number of clients have been nagging about how their power of attorney has been misused by the brokers for their own benefits. 

Adding to this, a number of other brokers have been put under probation of over Rs. 10,000 crores of shares and securities, fearing divergence of secrities from the client account. The main question is that even after receiving client complaints, why have NSDL and CDSL not taken any actions against the brokers?

What next, for KSBL?

After selling off their registrar and transfer agency, Karvy fintech to the American private equity investor, General Atlantic, stock broking is the only big business left with Karvy. In case, this issue stretches more and more misuse of client money is found out in SEBI’s investigation, it will be next to impossible for SEBI to regain client trust. Even if it does manage, it won’t happen anytime soon. 

What should the clients of Karvy do?

The senior executive said that “Clients can open a new demat account and move the securities that are with the Karvy demat account to it”. He further added, “However this can require a lot of paperwork such as indemnity bonds. Also since the depositories have been asked to monitor the movement of securities to and from client demat accounts, this will slow down the process further.”

If you have idle funds in your Karvy brokerage account, transfer all of them to your own bank account instantly. According to a 2009 SEBI circular, all unused client funds have to be transferred by the broker concerned to the client’s bank account at least once every 90 days. In your case, the 90 days may not have lapsed. If your transactions have failed due to the Karvy issues, if your securities have been transferred to Karvy’s own accounts or you notice some other issue or unusual change, what you can do is file a complaint with SEBI.

Written by

Priyanshi Bhardwaj