What is Karvy Stock Broking Fraud?

Introduction

In this article, we will see what precautions the retail investors should take after Karvy Stock Broking Fraud worth of Rs.2000 Cr and the details of fraud. On Friday, 22nd November 2019, SEBI (Security and Exchange Board of India) banned Karvy Stock Broking Ltd (KSBL) over client defaults worth Rs.2,000 Cr. SEBI banned Karvy from taking on new clients and executing trades for existing customers.

What Precautions Investors Should Take After Karvy Stock Broking Fraud?

What is Karvy Stock Broking Fraud?

Karvy Stock Broking is one of the largest brokers in India in terms of clients accounts. According to the data released by NSE, Karvy had around 2.5 Lakh clients as on October 31, 2019.

Investors complained to government as Karvy delays broking payouts

• Earlier this year, concerns are being raised about the financial problems at Karvy Stock Broking. Several investors had complained that payouts by the broking firm were being delayed.
• Investors across the country have complained to the Prime Minister’s Office (PMO), Finance Ministry and SEBI, seeking their payouts. 
• It was clearly suggesting that Karvy was facing a liquidity crunch and was unable to make payments to its clients.
• NSE had also received complaints from investors about irregularities by Karvy relating to their demat accounts.

What Karvy Did?

1. Karvy Stock Broking pulled out shares from its clients’ demat account which were inactive.
2. It transferred those shares to the demat account controlled by it (Karvy).
3. Then it pledged those shares with banks and raised funds.
4. Karvy then transferred these funds/money to its Real Estate arm, named Karvy Realty.
5. However, Karvy failed to return those shares to its clients from whose demat accounts it had pooled the shares at the beginning.

Details of Charges & Actions against Karvy Stock Broking

• Charges :
  • NSE reported that Karvy misused the Power of Attorney given by its clients. It sold client securities in the market via entities it controls and thus used the funds for its own purposes.
• Actions :
  • NSE has appointed a forensic audit of Karvy Stock Broking’s books to investigate the extent of misuse of clients’ demat account for its own purposes.
  • SEBI banned Karvy Stock Broking from taking on new clients and executing trades for existing customers.
  • Depositories – NSDL and CDSL are asked not to act upon instructions by Karvy on the basis of Power of Attorney (PoA).
  • Also, Depositories asked to monitor the movement of securities into and from depository participant accounts of Karvy’s clients.
  • Thus, SEBI had directed Exchanges and Depositories to initiate disciplinary actions against Karvy.

What Precautions the Retail Investors Should Take?

As a safety measure we suggest that if you have an account in Karvy Stock Broking and if you have not operated it over a long time, then you should visit that franchise of Karvy. You should check if everything is right there with regards to your account.

Lets see the key precautions the investors should take :

1. Check NSDL/CSDL statement every month

• The monthly statement of NSDL and CSDL contains the details of your orders and other transaction details regarding that particular month.
• NSDL and CSDL asked to send the monthly statement to the clients wherever client’s PAN number is registered such as demat account, mutual fund account etc. One can get all the details of the month in this monthly statement from NSDL or CSDL around 8th-10th day of every month.
• So, you should check and verify the details of the shares in your account every month. It is very important, so one should never ignore it.

2. Don’t let your account to become dormant

• Even if you are looking for the long term investment, still you should never let your account to become dormant.
• Keep your accounts active to get the statement regularly. Brokerages can target dormant accounts, if the clients are not paying attention to their accounts.

3. Opt for depository services at big PSU or private banks

• One can opt for depository services at PSU or private banks as a safety step since these banks are very well regulated.
• If you have idle funds lying in your Karvy brokerage account, you can transfer these to your own bank account.
• You can keep trading account anywhere you want, but try to open depository accounts at banks as a safeguard.

4. Understand the pros and cons of giving Power of Attorney to brokers

• You should thoroughly understand the pros and cons of giving Power of Attorney to brokers.
• Offering power of Attorney means you are offering the rights of transaction, share transfer to your broker. So you should be well versed with the consequences of it beforehand.
• In today’s busy schedule, on account of convenience basis, clients many a times offer Power of Attorney to brokers blindly. Here many important things can be missed out by the clients because of their ignorance.
• So, one should analyse the trade-off – convenience vs associated risk before offering the Power of Attorney to brokers.