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By: Maulika Desai (Editor)
The year was 1983. Five enterprising Chartered Accountants in Hyderabad decided to set up their own stockbroking and advisory firm – Karvy Stock Broking Ltd (KSBL). The venture quickly rose to prominence, becoming a respectable stockbroker on both the BSE and the NSE. It offered services globally in equity, commodities trading, mutual funds, depository and wealth management. With a growing clientele, Karvy garnered the trust of millions in the Indian financial markets. However, this seemingly–perfect tale of success took a dark turn in late 2019, when a scandal unfolded.
The Securities and Exchange Board of India (SEBI) discovered discrepancies in over 34,000 KSBL client accounts, which hinted at unauthorized activities. Karvy had been transferring shares and pledging securities without the knowledge or consent of its clients under the pretext of Power of Attorney (PoA). It continued to exploit the system despite SEBI’s efforts to regulate the PoA. Karvy diverted fully paid securities to a quasi-pool account, rather than transferring them to clients' demat accounts. This pool was then given as security to banks like ICICI Bank, HDFC Bank, IndusInd Bank, etc. to take loans. This money received from other banks was used to fuel Karvy’s real estate business. SEBI's efforts to track the account were thwarted by the absence of individual client identification, which allowed the company to misreport funds.
The scandal reached its peak when the NSE conducted a client-level audit and discovered that one particular client ID with a DP account was not reported by Karvy. Investigations further revealed that it consisted of fully paid shares of clients.
In response to the fraudulent practices, SEBI imposed stringent penalties on KSBL. The company was prohibited from onboarding new clients for stock broking activities, and NSDL and CDSL were instructed not to take any instructions for security transfers from Karvy. Instead, clients were required to request transfers directly with the depositories. NSDL was made to return nearly 90% of the shares to estranged clients.
KSBL and its promoter Comandur Parthasarathy were completely banned from the securities market for seven years. SEBI also imposed a penalty of Rs 21 crore on Parthasarathy. In May 2022, four former officials of Karvy Stock Broking were fined Rs 1.9 crore for their role in the embezzlement of clients' funds. SEBI further penalised two clearing corporations, ICCL and NCL, for violations in the Karvy Broking case. ICCL was fined Rs 50 lakh and NCL was fined Rs 25 lakh. In December 2022, it issued demand notices to the BSE and the NSE for their role in the scandal.
Having defaulted 2,300 crores of as many as 95,000 dormant client accounts, the Karvy Stock Broking Limited case served as a wake-up call for the Indian financial sector, emphasizing the importance of robust regulations and vigilant oversight. It underscored the need to prioritize investor protection and maintain the trust of investors in the financial markets.
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