Karvy Scam 1801106

KARVY SCANDAL
Introduction
In recent times these has been need of stock brokers who manage the money of people
because financial planning is a big part of life. People do not have enough time the
manage all their money so this is the place where brokerage firms play a big role is
managing funds.Not all people have time or enough knowledge to research and invest
in places which would give a good return so brokerage companies play a big role
helping such people
A stockbroker is a middleman who has the authority to buy and sell stocks and
securities in a stock exchange on the investor’s behalf.
They are governed under the SEBI Act 1992, Securities Contract Regulations Act,
1956, and also the SEBI (Stockbrokers and sub-brokers Regulations), 1992.
Karvy Scandal is one of the most famous ethical dilemma in India. This is about a
financial scam which involved an estimated amount of approximately over 2300 crore
which belonged to 2.5lakh investors.
THE CASE
On 22 November 2019, the Securities and Exchange Board of India (SEBI) passed an
ex parte ad interim order against Karvy Stock Broking firm,which is a Hyderabad
based firm, prohibiting it from taking new clients in respect of its stock brokerage
activities. Looking at the recent developments in securities market, the National Stock
Exchange(NSE) issued an 11-point advisory to investors on how to keep their stocks
safe. In a circular as per NSE“…the member has been expelled from the membership
of the Exchange under Rules 1 and 2 of the NSEIL Rules and has been declared as a
defaulter under provision 1(a) of chapter XII of Exchange bye-laws from 23
November 2020 after the close of market hours.”
The case is related to the fraud in conversion of client’s shares onto one of their own
demat accounts by misusing the Power of attorney issued by its clients. In return
Karvy had appealed in the SAT against these orders. On Tuesday an order was passed
by SAT presided over by Justice Tarun Agarwala and the members CKG Nair and
Justice MT Joshi said that Karvy is withdarwing appeals against NSE and Sebi and
dismissed both the appeals.
After knowing about the case following questions come to find
How many customers did Karvy have?
Karvy Stock Broking firm had over 10 lakh retail broking customers and executed
over 2 lakh transactions almost daily on behalf of their clients. Karvy have been in the
news for the last few weeks because some of the clients have complained of delayed
payouts. Typically, a person should get money in his account on the third day of the
transaction but some clients have complained that they did not receive their money
after more than a week of executing the trades.
Why was the payout delayed?
karvy had initially said that the delay in payouts was because of the technical issues,
but according to a preliminary probe by SEBI and the NSE, the late transfer was
because of misuse of client securities. According to the SEBI order issued on
November 22, the broking firm credited funds generated by client securities into their
own account. SEBI has stopped Karvy Stock Broking from signing new clients.
Further, an amount of ₹1,096 crore was transferred from the broking outfit to its
group entity Karvy Realty between April 2016 and October 2019. Incidentally,
appeals filed at the Securities Appellate Tribunal (SAT) further revealed that the
broking firm raised funds from Bajaj Finance, ICICI Bank, HDFC Bank and IndusInd
Bank by pledging client securities. Karvy Stock Broking firm owes more than ₹300
crore to Bajaj Finance. According to lenders, Karvy Stock Broking had even given an
undertaking that the securities that were being pledged were their own and not of their
clients.
What happens to the affected clients?
Most of the affected clients have got back their shares but it is estimated that a total of
around 95,000 clients of Karvy Stock Broking have been affected, the depository has
already transferred the securities of around 83,000 clients from the broking firm’s
account to the respective client accounts. The rest of the clients will have to wait since
SAT has suspended any further transfer of securities from Karvy’s account to the
client accounts.
What is the way out for investors?
The clients of Karvy Stock Broking have obvious reasons to be worried but the SEBI
order has clearly stated that the Karvy broking firm will not be able to further misuse
clients’ securities even if it has the PoA as the depositories have been given clear
instructions in the terms and conditions. Most of the affected clients have already got
their securities in their respective accounts so its not a big mater of concern any more.
However the Clients of Karvy should ensure that all their holdings are being shown in
their demat accounts. This can be easily done by checking the portfolio by logging
into the demat account . If an investor is yet to receive the payout , it is better to
approach the stock exchanges. Also, since the broking licence of Karvy Stock
Broking has been suspended,the clients will have to switch the account to another
broking firm.
Manjeet Sagar Pati

1801106

Karvy Scam 1801106

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KARVY SCANDAL

How many customers did Karvy have?

What happens to the affected clients?

What is the way out for investors?

Manjeet Sagar Pati

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