Karvy

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Brokerage

2019/ Sebi bans brokerage for suspected ₹2k-cr fraud

Nov 23, 2019: The Times of India

The Karvy brokerage fraud/ 2019
From: Nov 23, 2019: The Times of India

Markets regulator Sebi banned Karvy Stock Broking from accepting new investors over alleged misappropriation of shares and funds of its clients — worth about Rs 2,000 crore, which is one of the largest amounts by a broker in India.

In a rare move by the regulator, Sebi passed the ex-parte, ad-interim order against Karvy “to protect market integrity and save investors from any further loss”. Karvy Stock Broking is one of the largest brokers in the country in terms of client accounts. As of October 31, it had nearly 2.5 lakh clients, data released by NSE showed.

Sebi also asked NSDL and CDSL, the two depositories, not to act upon any instruction given by Karvy Stock Broking in “pursuance of power of attorney given by its clients”. NSE has already started a forensic audit of Karvy Stock Broking’s books to look into the extent of misuse of clients’ demat accounts for the broker’s own purposes.

Earlier this year, the NSE had received complaints from investors about irregularities by the broker relating to their demat accounts. The exchange’s inspection report showed that in 2019 itself, Karvy Stock Broking had transferred shares from 156 of its clients, all of which had shares in their demat accounts with Karvy Stock Broking but did not trade during the year.

Karvy’s modus operandi was simple: The broking house transferred shares from the demat accounts of its clients, which were inactive, to demat accounts controlled by the broking house. It then pledged those shares with banks and raised funds. These funds were transferred to Karvy Realty, its real estate arm.

NSE’s preliminary report was prepared after its ‘limited purpose inspection’ of Karvy Stock Broking conducted by it on August 19, covering a period from January 1, 2019 onward, Sebi said in its order. The ban was because there was a “need for urgent regulatory intervention to prevent further misuse of clients’ securities”.

Sebi also asked the depositories and stock exchanges to start disciplinary proceedings against Karvy Stock Broking “for misuse of clients’ funds and securities”.

Karvy Stock Broking has been given 21 days to file its objections or responses to Sebi. Market players said that since the period of inspection is limited only to 2019, the size of the scam is expected to jump manifold.