Karvy Default Shows Prolonged Regulatory Failure
Karvy Stock Broking Ltd (KSBL) was expelled by the National Stock Exchange (NSE) on 22nd November—a whole year after the market regulator, Securities and Exchange Board of India (SEBI) had suspended its operations and barred it from taking on new clients. KSBL had illegally transferred and pledged investors’ shares and diverted money to a realty firm. 
 
This action comes just three years after KSBL had paid Rs6.8 lakh to settle —action that followed a  SEBI inspection between April 2011 and November 2012 which threw up several lapses including non-compliance in handling clients’ funds. SEBI found that Karvy “did not observe high standards of integrity and fairness in conduct of business.” And, yet, SEBI’s ‘high-powered committee’ allowed the settlement. 
 
Shouldn’t KSBL and the Karvy group have been under greater regulatory scrutiny after they were allowed this ‘pay and get away’ facility? What about the applicability of ‘fit and proper’ norms to a firm that held investors’ power of attorney (PoA) to transfer shares and funds? 
 
The Karvy group has got away for too long by delaying punitive action by filing appeals and using the interim period to weaken charges and to lobby for settlement or a lesser charge.
 
This time, too, both NSE and SEBI gave it a very long rope. Just three months ago, when NSE initiated action against Anugrah Stock & Share Broking, its officials justified the time given to Karvy arguing that the group’s assets far exceeded its liabilities. Were the assets non-existent?
 
In the 2003-2005 period, Karvy was among the key players indicted in what is called the ‘IPO scam’ or the multiple applications scam, along with the National Securities Depository Ltd (NSDL). The investigation into over 100 IPOs (initial public offerings) unearthed evidence of fraud in 21 IPOs. A bunch of market intermediaries colluded with a set of shady operators (Rupalben Panchal being one) to make multiple applications under fictitious names and collude with investment banks and bankers to corner massive IPO allotments. 
 
Once shares were allotted to the fictitious fronts, they were consolidated into a few demat accounts at the share depositories before the shares opened for trading; this gave them a huge profit on listing. NSDL and CDSL (Central Depository Services India Ltd) either turned a blind eye or did not have the systems to detect fraud. SEBI’s IPO scam order had accused the entire Karvy group, comprising KSBL, Karvy Consultants Limited, Karvy Computershare Private Limited, Karvy Securities Ltd and Karvy Investor Services Limited, of having facilitated and abetted key operators at every stage—from filing applications to obtaining bank credit to buy shares, to consolidating them after allotment and obtaining refunds.
 
During CB Bhave’s tenure as the SEBI chairman, the regulator rapidly allowed all the smaller players to ‘settle’ their cases and close them with a fine. But Karvy’s case dragged on until 2014, when SEBI finally barred KSBL from taking up any new primary market assignments for six months. 
 
Karvy filed an appeal and obtained an immediate reprieve from the Securities Appellate Tribunal (SAT). Last heard, SAT set aside the SEBI ruling on 21 January 2015 and asked the regulator to pass fresh orders in four months. There is no information on action after this, barring the ‘settlement’ by Karvy in 2017. Is the matter still pending? Nothing seems to come up in web searches. 
 
It is a marvel of our regulatory system that SEBI neither kept it under close scrutiny, nor applied the ‘fit and proper’ criteria to Karvy, despite the huge fiduciary responsibility involved in all its roles as market infrastructure intermediaries. KSBL alone had over 12 lakh investors and held PoAs controlling a chunk of their savings and investments.
 
Two years later, as complaints against KSBL for not transferring and releasing shares began to mount, NSE and SEBI finally chose to act against what was essentially a heist of investors’ shares entrusted to KSBL’s fiduciary protection. 
 
In a nutshell, KSBL had pledged clients’ shares worth Rs2,300 crore with four major lenders to raise Rs600 crore. The lenders did not bother to check if Karvy owned the shares. Further, it had illegally transferred Rs1,096 crore to Karvy Realty Private Limited, a group company, between 1 April 2016 and 19 October  2019. 
 
And, yet, SEBI, as market watchdog, had allowed Karvy to settle a case that involving similar dubious deals in 2017 at a much smaller scale. Isn’t it pertinent to ask who in SEBI recommended the settlement and the names of the high-powered committee members who approved it without asking for closer supervision?
 
As I said earlier, NSE and SEBI gave Karvy a whole year to liquidate assets and bring in money to be paid to investors. On 22nd November, exactly a year to the date that market regulator had suspended KSBL for misuse of client funds (among other things), NSE finally declared the firm a defaulter and expelled it from the market. 
 
So what happened to Karvy’s assets that NSE was confident about? Were they fictional? The group sold its profitable R&T (registrar & transfer) business to General Atlantic Singapore Fund Pte. Other than KSBL, Karvy’s website lists the following group companies, most of them regulated by SEBI: Karvy Comtrade (commodities broking), Karvy Capital Ltd (non-banking financial services –NBFC—& portfolio manager), Karvy Investment Advisory Services Ltd (formerly an insurance broker), Karvy Holdings Ltd (core investment company), Karvy Middle East LLC (wealth management for NRIs—non-resident Indians), Karvy Realty (India) Ltd, Karvy Financial Services Ltd (NBFC), Karvy Insurance Repository Ltd, Karvy Forex & Currencies Private Ltd, Karvy Consultants Ltd, Karvy Data Management Services Ltd, Karvy Investor Services Ltd, Karvy Insights Ltd, Karvy Analytics Ltd, Karvy Solar Power Ltd, Karvy Global Services Ltd, Karvy Global Services Inc, USA (into business process outsourcing) and Karvy Inc, USA. Does none of them have surpluses to bail out KSBL? And will any of these capital market businesses be impacted by KSBL’s expulsion?
 
Neither SEBI nor NSE has offered an explanation. Remember, KSBL had illegally transferred Rs1,096 crore to Karvy Realty; was it returned? We don’t know. On 18th November, NSE announced that it had paid a combined Rs2,300 crore to settle claims of nearly 235,000 investors whose shares or money were stuck with KSBL and everyone with an outstanding of up to Rs30,000 will receive their dues. 
 
Even before NSE’s action, I have forwarded over 136 investor complaints to C Parthasarathy, Karvy group chairman, from the end of July until September. These were from investors who had responded to my query on Twitter. On 4th August, I received a detailed email and Excel sheet from Mr Parthasarathy about action in 91 cases, saying payments up to Rs20,000 had been cleared and shares transferred. Mr Parthasarathy wrote, “On the larger issue of refunding customers’ money. We have had a temporary setback, and there were delays. We have addressed most of the issues and are continuing to address the balance. We are also mobilising additional funds by divesting our holding in one of our subsidiary companies. There is no question of not returning investors’ money…” 
 
On 4th November, in response to a follow–up, he wrote, “Almost everybody to whom we had to effect a second tranche of payments, have been paid. There are however a few cases where shares are yet to be credited” and promised to pay the rest. I received no further responses from Karvy or Mr Parthasarathy. 
 
The upshot is that we still don’t know how many investors have not been paid and the amount involved. Neither SEBI nor NSE has provided details and Mr Parthsarathy is no longer responding to emails. In fact, even SEBI’s confirmatory order of 24th November  only speaks of a forensic audit, without disclosing its findings. Why this secrecy? Why was the forensic audit so delayed and why don't we have even interim findings in the public domain? It is because it would embarrass the Exchange and the regulator?  
 
Another question is about the adequacy of NSE’s investor protection fund (IPF). Despite a string of broker defaults, it is only recently that SEBI finally asked NSE to shore up the IPF from Rs594.12 crore to Rs1,500 crore (this is to happen on 26th November, with Rs300 crore as a reserve). Is this adequate to compensate Karvy’s investors even at Rs25 lakh each? We have no answers. 
 
Unless policy-makers and parliament begin to question regulators or investors manage to get good court orders, their investments remain at the mercy of poor supervision. 
 
NOTE

If investors of Karvy, who have not received their money, would like help in creating a support group on Telegram, to understand the way forward for recovery of dues, application to Investor Protection Funds-IPF and, if necessary consider a joint litigation, Moneylife Foundation will be happy to create the group (as we have done for investors of Anugrah Stock & Broking and Sahara India).

However, Moneylife Foundation will create the group on Telegram only if we have a minimum of 25 responses from Karvy investors. Respond on this link 
 

 

 

Comments
csdharankar
3 months ago
Thank you Sucheta madam and Money Life team for starting Money Life foundation in the interest of protecting small investors. In every scam the small investor is always been suffered or suffering.
My wife had a trading account with Karvy stock broking ltd (KSBL).
The KARVY scam/ scandal/ fraud is well known. The KSBL has misused the POA to illegally transfer (stolen) the shares/ equities/ securities of their client to the pull account. These are further pledged to take loans from banks for their real estate division (Karvy Realty). This has really broken the trust of investors with brokers! Thanks to SEBI/CDSL for starting a TPIN with Mobile OTP system recently as an alternate to the conventional POA system after learning this lesson.
After knowing this fact (theft/ chori/ loot/ dakaiti by KSBL), I have constantly taken the follow up with its Pune office. Many of my equities have been credited to my Dmat account, but some are still pending with KSBL. Now SEBI has declared the KSBL as defaulter so their Pune office is closed down and I am not able communicate with them.
Also during Dec 2018 to Oct 2019, I had noticed the irregularities/delay in payouts from KSBL, intuiting me that something is going wrong within KSBL. But carelessly I have ignored this indication by over trusting KSBL.
Then I filed a complaint with both SEBI (SCORES) and NSE online (NICE Plus) with sufficient proofs in the form of Contract Notes and Ledger statement of KSBL account. But SCORES has directed this complaint to NICE Plus, which has replied me in the following way- - -
# [On review of your claim and the details / documents submitted by you in support of your claim, the claim is inadmissible for any compensation out of Investor Protection Fund (IPF). However, your claim may be payable, which is otherwise due but not payable under the extant policy pertaining to IPF, from the assets if any, of the defaulter/expelled trading member or from the assets if any, in possession of any parties who may evaluate the claim separately. The same shall be intimated to you, in case the Exchange is in possession of such information in future.
In case you wish to file a review claim, the same must reach Exchange within 90 calendar days from the date of receipt of this letter / email along with additional details / documents to substantiate your claim.] #
Now I don’t see any hopes from SEBI/ NSE to recover my stocks from KSBL.
Now I have certain questions-
1) Who is the owner of my stocks (still pending with KSBL) which are stolen by KSBL through POA? Since these stocks are not debited from my Dmat account but only transferred to the pull account of KSBL. There is no record of debit of stocks from Dmat account.
2) Where to claim for my pending stocks other than SCORES/ NICE Plus? Since these two channels seems to be helpless.
3) Why SEBI or other regulatory bodies are not taking the possession of Karvy Realty to recover the loss of investors?
4) Till date no one KSBL promoter is punished or seen behind bars why? Since this is one of the considerable scam/ fraud/ loot of more than Rs 2300 crores of investors in stock market.
5) As per my knowledge, the KRVY is (was) the reputed and trusted name in financial services. I was happy with the KSBL service and that’s why I had referred many friends/ relatives to KSBL but now I am feeling guilty for that. Till Jan 2021 I was in a hope that everything will settled and will continue my relationship with KSBL but unfortunately not happened so . . .
The KSBL was having large customer base and everything was going well with good business. But this scam has not destroyed the well settled business only but the career of well settled KSBL employees too. . .
What KARVY has achieved ultimately?
What kind of mentality is this to destroy our own build business with hard work?
Why such kind of mentality (????? ???? ?????? ??????) have been seen many times in the history e.g. ILFS, Satyam, Sahara, DSK builder, KSBL . . .don’t know who one is going to join this list in future . . . Surprisingly the Real Estate/ Construction Business is seen behind these examples of scam !
I think, the KSBL has shrewdly managed the things such that it is in possession of small amount (Rs 20 k to 2 L ) of each small investors so that they are not bothered much about it! There might be many inactive investors (retired person etc.) who are not tracking the investment or really unaware about the scam.
I am requesting Sucheta madam to raise your voice against this scam and please guide us small investors in this matter. In one of the article she has proposed an idea to form the union of investors through social networking media against fraudsters. Can Money Life will take the lead to do so?
- Chandrashekhar S. Dharankar
sakuntala
11 months ago
Requesting some pointers . My husband passed away recently and his holdings are in Karvy Demat account. I have been requesting the transmission process and no response from Karvy. Any suggestions/ contact is highly appreciated.
Also, how do I join the Karvy - MFU group.
Ramesh Popat
11 months ago
such lethargy by regulators will explode by few more big cases,
in due course. investors will be trapped in. too bad indeed!
tillan2k
11 months ago
Looks the shabby job SEBI did was to cover up frauds and fraudulent deeds but matter was too hot and got blown up
yerramr
11 months ago
Have the major lenders realized the loan of Rs.600cr by sale of Rs. 2300cr after declaring the KSBL as fraudster?
gsreenat
11 months ago
Pls let me know if u have a telegram group for tracking progress on events wrt DHFL scam.
I am an investor in their secured NCDs .
tillan2k
11 months ago
Karvy survived for so long on a price an dnot as free loader or on its merit.. when India has highest bribery rate u know the secret of survival
padmarajonline
11 months ago
Madam,

I am also a victim of this Karvy scam and my funds are blocked pretty badly. As you have mentioned, the grey areas in the regulatory governance are a cause of big concern. Reports say about the movement of funds across group companies. Yet, it is 'business normal' for the other group companies! And even now, after being named a defaulter, the Karvy Chairman has the audacity of saying that the dues will be cleared by Jan 2021!
(https://www.thehansindia.com/business/karvy-sees-light-at-the-end-of-tunnel-658409)

A few months before, even the SEBI chairman seemed to be assuring the public that the Karvy group would clear the dues by Mar 2020 .(https://www.thehindubusinessline.com/markets/stock-markets/karvy-stock-broking-assured-to-clear-dues-by-march-says-sebi-chief/article30843594.ece).
Now, retail investors like us were definitely carried away by such assurance from the SEBI Chairman. But, now our recourse seems to be bleak.

Investor Protection Fund seems to be the only option left; again, only upto the monetary limit of Rs. 25L. Surprisingly, as I was going through some of the IPF guidelines, I find that the claims will be 'subject-to' many conditions (https://static.nseindia.com//s3fs-public/inline-files/Policy_for_evaluation_of_claims.pdf). My situation is that of a person who had parked money with the broker for F&O margins and intended share purchases. The ‘Policy for evaluation of claims’ isn’t addressing such claims clearly and I am worried. Interestingly, the policy is effective for settlements after 20 Nov 2019 - two days prior to suspension of Karvy!

Appreciate if you could share or write a detailed article on the recourse available to Investors under the Investor Protection Fund and the procedure involved. I couldn’t find any such detailed article online. I am sure it will be of much help to many of the retail investors like us.

Also, Greatly appreciate your several initiatives voicing the concerns of retail investors.

Padmaraj Kaylasam
saisindhura333
Replied to padmarajonline comment 11 months ago
+1
jaganramesh2003
11 months ago
The writing is quite thoughtful. I am one of the unfortunate few whose PoA was misused. When the scam broke out the scene at their office in TNagar was pathetic. No body had any clear idea.

I have sent many mail to Karvy. You get a very standard reply, apologising profusely! !( who wants their apology) and assuring that things will be sorted out soon. Now it is one year.

As rightly pointed out by Ms.Sucheta, why it has taken such a long time to expel them is quite baffling.

Also, what is the role of SEBI , NSE etc ( just issuing ad like soch kar........!)

The broking business needs a thorough overhaul. It should be possible to do away with POA business in the present online trading.

Who will bell the cat
Meenal Mamdani
11 months ago
This is very worrisome indeed.

We know that the promoters and directors of errant firms are guilty of siphoning funds and so try to hide there offenses.

Why do the officials in the regulatory bodies not willing to take action? What do they get out of putting off actions on these crimes?

Are they being bribed? In India, every one is related to someone, so are these regulatory officials related to the officials of the firms they are regulating? Or are they just lazy as they have to do considerable work to unearth and document the wrongdoings and they would rather avoid that and continue to get fat salaries?

In the interest of transparency, it is time that those in SEBI, NSE and SAT who pass judgements on cases brought before them, should have their names published henceforth.
If they are crooked, the people around them will know and leak their hidden assets to the investigating agencies. If they are stupid, at least the people around them will now know of their stupidity and stop asking them for advice. And if it is laziness that is doing this, their productivity reports should be available for those who want to look at them.

Money Life Foundation, particularly Ms Dalal, has been pointing out the sins of commission and omission of these regulatory bodies for so many years, why are the higher authorities not doing anything? Are they too in cahoots with these errant officials?
rajeshdahiya7
Replied to Meenal Mamdani comment 10 months ago
The article is really very informative. There are still 58000 shares of different companies are pending for transfer in my and my wife's demat account. I wrote several emails but everytime, I just got standard reply that the needful will be done shortly, I approached their office but still no action. Now, I got mail from CDSL regarding termination of their agreement with Karvy. I can only hope that they will transfer my shares to my demat account.
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