The Securities and Exchange Board of India (SEBI) severely cracked down on the MD and independent directors of Karvy Stock Broking Limited (KSBL), marking an inflection point in the stock market scam that siphoned off crores in investor wealth and also prompted deep and structural investor reforms.
The Karvy demat scam, when it came under the public glare, raised thorny issues of regulatory failure and brought to the fore embarrassing shortfalls in SEBI's scope of supervision. One can gauge the gravity and critical attention accorded to this issue from the recent comment of SEBI chief Madhabi Puri Buch, who emphatically spelt out that another Karvy-like event will happen over the regulator's dead body.
In an order delivered by Whole Time Member SK Mohanty, the market regulator has directed Karvy Realty (India) Limited and Karvy Capital Limited, two subsidiaries of KSBL, that were beneficiaries of illegal transfers from their parent company to return an amount of Rs 1,442.95 crore within three months. If the two beneficiary companies fail in returning the transferred funds, NSE has been directed to take control of assets of the two companies, in order to recover the amount. The aforementioned funds were transferred out of KSBL between FY17 and FY20.
The market regulator has also penalised KSBL and its MD Comandur Parthasarathy to the tune of Rs 13 crore and Rs 8 crore respectively for violations of several SEBI circulars and regulations. It has also barred KSBL and Parthasarathy from accessing the securities and dealing in securities, in any manner, for a period of seven years.
Independent directors of the company, namely, Bhagwan Das Narang and Jyothi Prasad have also been penalised to pay an amount of Rs 5 lakh. Both of them have also been restrained from holding the post of director, or any key managerial position or associating themselves in any capacity with any listed public company and any public company for a period of two years.
Lastly, CEO Rajiv Ranjan Singh, who was found to have acted negligently and failed in exercising due diligence has been cautioned and has been directed "to be careful before associating himself as a director or any key managerial position in any intermediary of the securities market or any listed public company".
The Karvy demat scam, which first came to light in the second half of 2019, was orchestrated by the brokerage house by pledging securities lying in the demat account of unsuspecting customers. The pledging, which happened behind the customer's back, was done to raise funds from banks and other NBFCs. Loans were raised from the likes of HDFC Bank, Axis Bank, IndusInd Bank, Bajaj Finance, Aditya Birla Finance and others.
In September 2016, KSBL’s outstanding borrowing under the loan against securities (LAS) facility offered by banks stood at Rs 789.41 crore, with the overall borrowing standing at Rs 1,051.36 crore. The said overall borrowing of KSBL increased to Rs 2,032.67 crore by September 30, 2019.
Simultaneously, there was a substantial increase in the pledging of securities by KSBL. The value of securities pledged increased from Rs 202 crore on June 30, 2017, to Rs 1,855 crore by March 2018 and had further increased to Rs 2,700 crore by September 2019.
The regulator also found out that as on September 05, 2019, at least 75 percent of the total shares in all its clients’ holdings were pledged by KSBL to borrow funds for its own use, which included cases where the clients’ holdings were pledged despite such clients having credit balances in their accounts maintained with KSBL.
"The massive asset mobilization drive followed by raising of huge sums of funds from financial institutions by using the securities mobilized from the clients with a promise to pay them interest and misappropriating those funds...speak a tell-tale story of fraud driven by the greed of KSBL and its management to amass thousands of crore of rupees at the cost of its innocent clients, making it a fit case where SEBI needs to send out a firm message to deter the stock brokers and their managements from indulging in such acts of unethical, unfair and fraudulent behaviour as observed in this case," the WTM observed in its order.
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