After Karvy debacle, banks begin review of brokerage exposures2 min read . Updated: 09 Dec 2019, 08:23 AM IST
- Lenders have asked brokers to verify the ownership of securities
- Sebi is expected to decide on the lenders’ representation on 10 and 12 December, as per the SAT order
Mumbai: The Karvy Stock Broking debacle and the ensuing loss of securities underlying their secured credit have forced lenders, especially banks, to review their exposure to brokerage firms, three people with direct knowledge of the matter said.
Fearing that more secured loans could turn unsecured if the loans are backed by client securities, these lenders have sent out letters to brokers to verify whether these securities belonged to them or to clients, these people said on condition of anonymity.
“We are taking a relook at the documentation and other risk management measures required to ensure that the loan against pledged shares is not misused, like in the case of Karvy," said the chief risk management officer of a private sector bank, one of the three people cited above.
Some banks have also begun a review of their exposure to smaller brokers and are considering reducing it by 10%, said the proprietor of a mid-sized brokerage and the second person cited above.
This follows a 22 November notification by the Securities and Exchange Board of India (Sebi), which barred Karvy Stock Broking Ltd from adding new clients or acting on behalf of clients, and ordered depositories to transfer securities only to their beneficial owners.
Karvy is accused of misusing client securities worth ₹2,800 crore to secure loan facilities from lenders towards working capital. The brokerage also sold off client securities and transferred the proceeds to its real estate group company.
Following the Sebi directive to transfer securities only to beneficial owners, the National Securities Depository Ltd on 2 December transferred ₹2,013 crore into the accounts of 83,862 Karvy clients, which is almost 90% of the affected clients.
Four lenders then approached the Securities Appellate Tribunal (SAT) saying the shares were pledged with them and therefore they had the right over these shares.
On 4 December, SAT ruled that reversing these transfers was untenable, leaving the lenders with no securities to invoke the pledge.
Karvy owes ICICI Bank ₹642 crore and HDFC Bank had granted the brokerage a loan facility of ₹350 crore. IndusInd Bank has an exposure of ₹132 crore. Another lender, Bajaj Finance Ltd, has an exposure of ₹345 crore, and its plea has already been referred to Sebi for a relook. The total estimated exposure of these four lenders is ₹1,400 crore.
The banks were required to file representations with Sebi for redressal of their lost shares. “At least three of the lenders sought that Sebi allow them more time to file representations," said a lawyer representing the lenders.
Sebi is expected to decide on the lenders’ representations on 10 and 12 December, as per the SAT order.
“We have received letters this week from bankers trying to verify that the securities belong to us and not to the clients," the second person said. “In the Karvy issue, Bajaj Finance had, in fact, relied on the brokerage firm’s assertion that securities belonged to it and not clients."
While the banks have increased their due diligence on broker exposures, a Sebi official, the third person cited earlier, said this should have happened earlier.
The official said: “Sebi had issued a circular on 20 June this year, asking brokers to segregate their securities from client securities, and prohibited them from using client securities for funding purposes. Considering the changes in rules, the banks should have increased their due diligence earlier. Brokers were also required to unwind the pledges which used client securities, by the end of September, and many of them are yet to affect the same."