Photo: Mint
Photo: Mint

What to do if you are a client of Karvy Stock Broking

  • According to the SEBI order, Karvy transferred client securities to itself
  • If you are among the roughly 2.44 lakh clients of Karvy Stock Broking, what should you do?

Yesterday, on 22nd November, SEBI issued an interim ex parte order against Karvy Stock Broking Ltd. The order restricted Karvy from taking on new clients. It also directed the two depositories – NSDL and CDSL from honouring instructions given by Karvy. These instructions are given in the ordinary course of events for settlement of trades through a Power of Attorney (PoA). The order was issued against Karvy for numerous violations of SEBI norms including the transfer of client shares to itself and pledging of client shares to raise money for itself. If you are among the roughly 2.44 lakh clients of Karvy Stock Broking, what should you do?

What Karvy did

According to the SEBI order, Karvy transferred client securities to itself. The broker also raised money by pledging client securities and transferred this money to its own account. The exact amounts of the various violations are a little unclear. According to the SEBI order a net amount of 1096 crores was transferred by Karvy Stock Broking to its group company, Karvy Realty Private Limited. In response to the violations, the SEBI order requires the depositories to monitor the movement of securities into and from the Depository Accounts of the clients of Karvy Stock Broking. However it also forbids the depositories from honoring instructions of Karvy Stock Broking.

According to a senior executive at one of India’s largest brokers, the SEBI order on Karvy instructions on the basis of client PoAs, can prevent existing client trades from being settled. India follows a T+2 cycle which means that client trades executed on Thursday and Friday will come for settlement on Monday and Tuesday respectively. "Sebi directive against Karvy pretty much bars the brokerage firm from executing and settling future trades on clients behalf. Even the trades that were executed on Friday cannot be settled by Karvy and depositories would need to monitor delivery for settlement of those trades," said Anubhav Ghosh, Partner, Law Point.

In such a scenario, the counterparty is also affected, but there are safeguards in place for them. When the seller is unable to deliver the shares, the exchange initiates an auction to purchase and deliver the shares to the buyer. Penalties are also levied against the defaulting party. As a backstop, the exchanges also have a settlement guarantee fund to ensure that trades are honoured. Futures and Options (F&O) trades will not be directly affected by the order, but if the broker fails to maintain the margin with the exchange these will be squared off by the exchange, said the aforementioned senior executive. This will ultimately hurt the client who has undertaken the F&O trade in question, he added. Many F&O trades also require cash delivery and hence can get affected.

The Karvy group has numerous other operations such as commodities broking, wealth management, mutual funds registrar and transfer (RTA) services and central recordkeeping services for NPS. These will not be directly impacted by the broking violations and consequent SEBI order.

What you should do

“Clients can open a new demat account and move the securities that are with the Karvy demat account to it," said the aforementioned senior executive. “However this can require a lot of paperwork such as indemnity bonds. Also since the depositories have been asked to monitor the movement of securities to and from client demat accounts, this will slow down the process further," he added. If you have idle funds lying in your Karvy brokerage account, transfer these to your own bank account immediately. According to a 2009 SEBI circular all unutilized client funds have to be transferred by the broker concerned to the client’s bank account at least once every 90 days. However in your case, the 90 days may not have lapsed. If your trades have failed due to the Karvy defaults, if your securities have been transferred to Karvy’s own accounts or you notice some other irregularity, file a complaint with SEBI. You can read more about this procedure here.

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