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MUMBAI : Around 95,000 clients of Karvy Stock broking Ltd, almost all of them retail investors, are staring at uncertainty as they wait to regain access to their shares and receive payouts from the broking firm.

While customers can typically change their broker by opening an account with a rival brokerage by obtaining a client master report and initiating a closure-cum-transfer request, several of Karvy’s clients have alleged that the firm is deliberately delaying payouts and preventing them from moving to another broking firm.

“Karvy is not moving shares from the pool account to DP Holding (demat account). Only when these transfers happen can we start trading with another brokerage firm," a Mumbai-based investor said on condition of anonymity. “Not just that, payout requests are also not being honoured, purchased securities are also not being delivered in the demat account of investors." he alleged.

Some more investors, who spoke to Mint, said several complaints have been lodged against Karvy with markets regulator Securities and Exchange Board of India (Sebi) about this issue and action in this regard is awaited.

Sebi chairman Ajay Tyagi. The market regulator’s order came after it was found that Karvy had used client stocks to raise funds and transferred them to other group businesses.
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Sebi chairman Ajay Tyagi. The market regulator’s order came after it was found that Karvy had used client stocks to raise funds and transferred them to other group businesses.

A 22 November Sebi order barred the firm from taking on new clients and trading on behalf of existing investors. The order, however, did not restrict the firm from making timely payouts to investors.

Deepesh Kumar, a Mumbai-based client of Karvy, shared a similar experience: “Regulators should ensure that money in trading accounts of clients are transferred to clients’ linked bank accounts. According to Sebi’s broker regulations, quarterly transfers are required to be made from the pool account to clients’ accounts even if clients have not made such a request.

“Karvy may misguide the regulators by falsely claiming that clients have not initiated requests for refund."

The Sebi order came after it was found that the broking firm had used client stocks to raise funds and transferred them to other group businesses. The total misappropriation, according to the preliminary findings of the National Stock Exchange of India (NSE), which conducted an audit, stands at 2,000 crore, making it one of the largest defaults by a stock broking firm in India.

Security breach
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Security breach

Currently, Karvy has close to 244,000 clients, a large chunk of which are retail investors with investment size ranging from a few thousand rupees to a crore.

“Investors are unfortunately at the receiving end of this scam as they are unable to withdraw funds or transact in securities that rightfully belong to them. This is akin to robbery of their savings and investments," said Shriram Subramanian, founder and managing director of InGovern Research Services Pvt. Ltd, a corporate governance firm. “Also, there is uncertainty on the scale of this scam by Karvy. It is also highly likely that many other broking firms are adopting such crooked practices."

Industry watchers say the most problematic transactions, which could create hurdles for investors, involve those where stocks worth 1,096 crore were sold and proceeds transferred to Karvy Realty, a group company. These transactions are the focus of a forensic audit being done by EY India Ltd as ordered by NSE.

Karvy, on its part, is promising investors to make the payouts soon, asking them to remain patient. In an emailed response, a spokesperson for Karvy said the company will make a payout of 25 crore to 200 clients, due under Sebi regulations, in two weeks.

However, the Karvy group is facing liquidity issues, which may make it harder for it to meet payment obligations. The liquidity problems for the firm started with its commodity broking business in the third week of November when it delayed payouts to some of its clients for 10 days or more.

Rating agencies Icra Ltd and Crisil Ltd have downgraded the stock broker and bank facilities of its group businesses.

Icra on Wednesday downgraded two instruments of Karvy Stock Broking on the basis of a recent Sebi interim order.

Meanwhile, the broking firm on Thursday filed an appeal in the Securities Appellate Tribunal against Sebi’s interim directions.

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