The Karvy scam and lessons for Investors
The investment community woke up to a rude shock when the capital market regulator, SEBI passed an ex-parte-ad-interim order against Karvy Stock Broking for unauthorized use of clients’ money.
According to the order of SEBI, Karvy has pledged investors’ shares worth Rs.2800 Cr, affecting more than 123000 investors for their own benefits. In addition, Karvy Stock Broking has routed this money to Real estate business of Karvy from 2016 to 2019. Now, Karvy can continue the activities pertaining to the existing customers but it cannot accept any new clients.
The order further states that Karvy Stock Broking transferred securities worth Rs.27.8 crore in off-market deals from demat accounts of 156 clients, who had not executed even a single trade with them. Additionally, securities worth Rs.116.3 Cr transferred from 291 clients who had not traded with Karvy since June 1, 2019.
However, Karvy Chairman, C Parthasarathy stated that Karvy made the subsidiary companies and Karvy Realty have been in existence for 12 to 15 years. But, there is no linkage between the pledging of shares and the entire amount of investments made in Karvy Realty, subject to which, the number mentioned in the order has to be reconciled.
Lesson for investors
t's high time that the Investors be more vigilant and precautious.
1) Keep a track of messages and emails received from broker. Every time an investor buy or sell a stock, the stock exchanges also send out trade confirmation messages to the investors. Make sure to reconcile the information given out by the exchange with the information provided by the broker. If there are discrepancies, one should dig deeper.
2) It is mandatory for brokers to payout the cash balance of investors lying with them at least once in 90 days. If the broker is not doing that or fails to inform about the ledger balance or the stock statements, investor may be at risk. One should ask the broker to furnish this information on a regular basis.
3) Always make sure you keep a check on the number of shares you bought of every company in your portfolio. The two depositories, NSDL and CDSL, send monthly-consolidated statements to investors. These statements capture all details of the stocks, bonds and other securities held in investor’s demat account, as well as the units of mutual funds. It also gives details of transactions that took place during the month.
4) If broker does not follow the best industry practices, it is time to move to a better provider. Opt for a broking outfit with strong financials and few complaints against it.
When a Power of attorney (POA) is given to allow some other person to transact on your behalf, it can definitely be misused. The power of attorney given to the broker while opening an account is a ‘limited-purpose POA,’ as it allows specific transactions such as transferring shares that are sold through the broker on an exchange. It also excludes certain transactions such as off-market transfer of shares.
Despite numerous regulations, this (Karvy) case of broker defaults in the equity segment has raised question marks over the practices followed by brokerages.
Now the million dollar question is – who is responsible for this tragedy, whether
1) Stock exchanges – BSE and NSE – because brokers are regulated by them, or
2) Depositories – NSDL and CDSL- because they did not act promptly even after receiving various client complaints, or
3) Banks – did not show due diligence, or
4) SEBI – As regulator, how it could not detect defaults of brokers’ inspite of expensive surveillance system and various client complaints received against brokers.
What to do if you have an account with Karvy?
If you are stuck with a broking account with Karvy, it is preferable that you shift your demat and trading account to other broker. If you have some funds that you are not able to withdraw, one way is that you buy some stock or Liquidbees and then transfer the account. When you will transfer the account all the shares will be also transferred after which you can sell the shares and withdraw from the other broker