How Karvy used 95,000 client stocks to raise funds for itself

Hyderabad-based Karvy Stock Broking pledged securities worth Rs 2,300 crore of almost 95,000 clients with three private banks and a large non-banking finance company as collateral to raise loans worth over Rs 600 crore for itself, according to two persons with direct knowledge of an ongoing probe by the Securities and Exchange Board of India (Sebi) into the client positions of a number of retail brokers. The outcome of the Sebi investigation is yet to be made public.Last week, the capital market regulator banned Karvy from taking new clients over client defaults worth Rs 2,000 crore. The Sebi order said the stock broking firm misused clients’ power of attorney provision and transferred Rs 1,096 crore to its group company, Karvy Realty.The extent to which Karvy used client securities as collateral to raise funds for itself emerged after Sebi carried out additional inspection of client positions in May, said one of the two people privy to the investigations. 72250760 “Sebi verified the opening balance of brokers lying with clearing corporations. Client transactions were tracked with depositories. Sebi got 21,000 alerts in one day while carrying out this exercise,” the person said.“This raised the alarm and it was observed that clients’ securities were transferred to third party accounts and not to the DP (depository participant) account of clients.”The Sebi order of November 22 said that the National Stock Exchange (NSE) conducted a ‘limited purpose inspection’ of Karvy Stock Broking between January 01, 2019 and August 19, 2019.Some months ago, Karvy’s total pledge of clients securities was worth Rs 2,800 crore but that has come down to Rs 2,300 crore.“For the last few months, Sebi had been progressively getting Karvy to bring down the pledge levels,” the person quoted above said.Sebi has termed the pledge of clients’ securities with lenders as invalid. The regulator plans to take up the role of the lenders with the finance ministry and the Reserve Bank of India (RBI).“How can banks allow firms to pledge clients’ securities as collateral and give loansRs What sort of duediligence are they doing before giving loanRs ” said the second person quoted above.Sebi did not respond to ET’s email seeking comments.Karvy, responding to ET’s queries, said that the loans availed by pledging client securities were about Rs 400 crore and not Rs 600 crore.“The pledge of clients’ shares with the banks is a practice that is normally undertaken by all broking companies, in so far as the amounts due to them are concerned,” the brokerage’s spokesperson said. “The securities of the clients that are pledged with the banks pertain to only those securities for which the client is yet to pay the full amount.”Sebi said in a circular issued in June 2019 that brokers must segregate securities and funds of clients.Several brokers have survived on a business model that involved pledging clients’ shares held in brokers’ account. The regulator’s decision came in the wake of various complaints alleging mishandling of clients’ securities and money by broking firms.Karvy defended the use of clients’ securities to raise funds for itself. “Clients’ securities, which are not yet fully paid up, do not legally belong to clients, till they are fully paid up,” the spokesperson said. “The powers of attorney received from the clients are used for the purposes of ensuring that these are transferred to the pool account, and thereafter to the clearing corporation. Sometimes though, we leave the shares in the pool itself if clients are active traders or, if they have instructed us to do so.”Sebi’s June circular said brokers could not pledge clients’ securities even if they are partly paid up.“Being essentially a retail organisation, we have found it difficult, and we are in the process of winding down all the securities that have been pledged. For most banks, we have already provided alternative collaterals to release the pledge and are in an advanced stage of negotiating with the other banks. There is no directive from Sebi that the pledge is invalid,” the Karvy spokesperson said.

from Economic Times https://ift.tt/2DlKEjy