Karvy Stock Broking was a stockbroker with 12 Lakh clients, each client holding a demat and broking account. Clients used to buy/sell stocks through Karvy and the stocks are deposited in the demat account.
WHAT WAS THE FRAUD COMMITTED BY KARVY STOCK BROKING?
Whenever an individual opens a stockbroking account, he/she gives Power of Attorney(PoA) to the broker, a simple instruction that allows him to debit the Demat account to effect the transfer of stocks.
Karvy created a Demat account in its own name-Karvy Stock Broking-Client account and did not report it to the NSE. Using the Power of Attorney of various individuals, stocks/securities were transferred from clients’ accounts to their accounts.
To put it more simply, when clients bought shares, rather than them being credited to their respective Demat accounts, they were directed into the company’s account. This act was deemed to be unethical and illegal and a clear misuse of the Power of Attorney being handed to them.
With the help of these securities, the company approached big financial players like ICICI Bank, HDFC Bank, etc. and pledged them for loans. The loan was granted with these stocks as collateral. NSE during its audit unearthed this money heist and informed SEBI. Around Rs. 2300 crores worth of shares were pledged and loans taken by Karvy Stock Broking on shares that never belonged to them.
Image credit: Times of India (TOI)
STEPS TAKEN BY SEBI - KARVY STOCK BROKING
SEBI banned Karvy from taking new clients and executing trades over allegations of misusing its power. SEBI said that the unauthorized use of clients’ funds created a serious doubt over the conduct and integrity of KSBL. NSE and BSE suspended the trading license of Karvy and barred it from exercising the PoA given by its investors.
WHAT HAPPENED TO THE AFFECTED CLIENTS?
Since SEBI suspended operations of Karvy Stock Broking, its investors were not allowed to do any transaction in that Demat account. They had to open a new trading and Demat account with another broker of their choice and move the stocks from Karvy’s Demat account to their new account. The investors faced a lot of problems and complications in transferring their securities as the financial lenders argued that since these securities were pledged with them, they have a right to these securities.
WHY IS THIS SCAM IMPORTANT?
This scam is one of the biggest cases of broker defaults in the equity segment and despite numerous regulations, the fact remains that clients’ money and securities were brazenly misused by KSBL for its purpose. The scam also highlights how easy it is for firms and trading operations in the Indian stock market to misuse their clients’ money and securities for their interests and profits.