SEBI Cancels License of Karvy Stock Broking

Securities and Exchange Board of India (SEBI) has cancelled the licence of Karvy Stock Broking with immediate effect after it was found that Karvy did not comply to the regulations of the exchange. Karvy, a Hyderabad-based stock broking firm allegedly misused customers’ shares worth Rs. 2,300 crores. It pledged clients’ securities to raise loans against the regulatory norm of SEBI.

SEBI had come up with a circular in June 19, 2019 that restrained brokerages from pledging clients’ securities and if pledged already, then unpledge it by September 30, 2019. Any pledge created on clients’ security post month of September was to be considered as a violation of norms. All brokers were required to transfer the securities held by them to their customers’ accounts respectively. Karvy failed to comply to the new rule of Stock Broker Regulations.

The move comes within a couple of weeks after SEBI had barred Karvy from making new clients and trade execution for the existing customers. There were also complaints about Karvy Stock Exchange Limited (KSBL) from many investors on misuse of funds. Upon suspicion, National Stock Exchange (NSE) had initiated a preliminary investigation on Karvy as it directed Ernst and Young (EY) to conduct a forensic audit.

Reports reveal that the Karvy, one of the largest retail brokerage houses, has been illegally selling client shares through associated entities and diverting the funds to its sister company, Karvy Realty, a real estate business. It used customers’ shares to fund itself and is prima facie in violation to the SEBI circular of June. Based on this Interim Report by NSE, SEBI banned Karvy from operating Demat accounts even for legitimate purpose before finally suspending it’s license on Friday from all segments – equity, debt, cash market, currency derivatives and commodity. National Stock Exchange (NSE), then Bombay Stock Exchange (BSE) and now Multi Commodity Exchange (MCX) has also suspended its membership.

Karvy, a stock broker acted as a mediator between stock exchanges and investors (with Demat Account for stock exchange). Karvy brokers took money from investors and bought shares for them from the exchange via Karvy Demat Account called ‘pool’ which was a temporary store for purchased stocks.

If the shareholders wanted to sell the shares, they must be transferred from the shareholder’s demat account to pool from where Karvy will sell it further and give the money back. This required clients to give their Power of Attorney (PoA) to allow Karvy to sell the stocks. Perhaps, Karvy misused it by taking loans on these shares and giving to their real estate arm which led to the urgent regulatory intervention.
What Customers need to do now?

There are two scenarios: Your shares are either in National Securities Depository Limited (NSDL) or Central Depository Services Limited (CDSL) or not in them. If they are in NSDL or CDSL, both provide a ‘View Only’ access. First, check your shares in NSDL/CDSL, whether the number is equal to what Karvy claims that you own. If it is so, then in that case you’re on the relatively safer side. Create a new Demat account at any other trusted broker, transfer the shares from the Karvy Account to the new one. You might not be able to trade at Karvy anymore.

Incase, Your shares are not in NSDL or CDSL or less in number to what Karvy has stated that you own, then it might be in ‘pool’ or Karvy Demat Account. Follow them up to transfer the shares to demat account as they can’t take it from investors. If it doesn’t happen, then take the legal route. It must be noted that only if SEBI thinks that there are chances of further losses or damage, then only an ex-parte (with respect to the interest of only one party) order is given.