Brokers are as such a shrinking clan. In the earlier days, brokers and sub-brokers ruled the roost- they became family friends like the ‘family doctor’ and ‘family priest.’ With corporatization, the clan of sub-brokers can now be only read about in books or heard from the elders. On the other hand, brokers had reinvented themselves and were slowly becoming, for some, like a family financial advisor. That’s the kind of trust some people reposed on the brokers. And over the past few months that trust has also been broken.
The fall of Karvy has shocked the already numb people – you can’t trust a bank, you can’t trust a NBFC and you can’t trust a well known broker; so where does one keep the hard earned money?
Today morning, the BSE and NSE suspended Karvy Stock Broking from operations with immediate effect for not complying with regulatory norms. The stock broker has been barred from participating in the cash market, equity, commodity and currency derivative, debt and mutual fund service system segments. Ditto the BSE.
This comes on the back of SEBI banning Karvy Stock Broking from signing up new customers and directed depositories to not act on any instruction from the broker.
So what exactly did Karvy do? Here is a quick breakdown of the what, how and why of the Karvy saga.
Karvy violated norms by transferring client shares to itself and pledging clients shares to raise money, which in turn was diverted to the real estate arm. Some 2.40 lakh clients complained to SEBI about neither the money nor the shares coming to their account. Shares in the depository belong the client and Karvy had no business using them for its benefit. Also if shares were pledged, it should have been for the meeting the client’s need and not for Karvy’s needs. Karvy’s deed was so bad that it misused even the power of attorney given by its clients to clandestinely sell client securities through entities controlled by it, and used the funds for its own purposes. This is possibly the worst breach of trust!
What is the fraud in financial terms?
Based on what came out from scrapping the mere surface, where the probe was done for transactions starting 1st Jan 2019, SEBI said a net amount of Rs.1096 crore was transferred by Karvy Stock Broking to Karvy Realty. The total amount of fraud currently is put at Rs.2000 crore.
Are Banks affected too?
Any fraud happens, of course the banks are affected. Banks and finance companies have a Rs 1,415-crore exposure where ICICI Bank has the maximum exposure of Rs 875 crore, which was created only on October 1, 2019. HDFC Bank has an exposure of Rs 195 crore, IndusInd Bank Rs 105 crore, DCB Bank Rs 55 crore and Axis Bank Rs 85 crore.
Will investors lose money here also?
The assurance we get now is that clients will not lose money as the value of the pledged shares is more than the money which Karvy removed. Also there is no default; it is more of a fraud where funds are there, only not in clients accounts. And in case funds are insufficient, only then an issue could arise as Insurance Protection Fund (IPF) can be used only if a trade happened and not when pledged. But those who do not get the money, they need to lodge a complaint with SEBI Scores, BSE and NSE grievances platform – without a complaint you will not be eligible for any fund from the IPF.
A Karvy account is not eligible for trade, so how does one trade now?
Your broker, for now does not exist. So you need to look for a new one. Trust deficit will now be a constant but we suggest go for the one affiliated to banks or institutions. Never ever go with small brokers as they themselves are facing an existential issue.
Whatever way we look at it, currently there is a major crisis of trust. IL&FS, DHFL and PMC Bank, now Karvy – one really does not know who will go down next. What we have sadly also learnt is that despite stringent rules and regulations, inspections and monitoring, scams are only getting larger and larger. Today, Harshad Mehta looks like a saint!