In further action against Karvy Stock Broking Ltd (KSBL), the Enforcement Directorate (ED) has issued an order for freezing shares of the group held directly and indirectly by KSBL chairman and managing director (CMD) Comandur (C) Parthasarathy, his sons, Rajat and Adhiraj, and their entities, to safeguard proceeds of the crime.
The development comes in the wake of search operations on Wednesday at six locations connected to Karvy Stock Broking under Prevention of Money Laundering Act (PMLA) 2002.
The ED had conducted search operations on various premises of Karvy group of companies, connected entities and at the residential premises of C Parthasarathy. During the course of the search, several incriminating pieces of evidence in the form of property documents, personal diaries, electronic devices, email dumps, etc, have been seized and are being analysed, ED officials stated on Saturday.
It is reliably learnt that Mr Parthasarathy was trying to off-load his shares in the group companies through private deals and, thus, to preserve the proceeds of crime till further investigation, ED has issued a freezing order on 24 September 2021 under PMLA 2002. The estimated value of these shares has been arrived at Rs700 crore as per the valuation for the year 2019-20, the ED officials stated.
It may be noted that ED had initiated a money-laundering investigation on the basis of first information reports (FIRs) registered by Telangana Police on the complaint of HDFC Bank alleging that KSBL had illegally pledged the securities of its clients and taken a loan of Rs329 crore and diverted it.
HDFC Bank, in its complaint, alleged that KSBL defaulted on the loan taken in 2019. The stockbroking company had taken a loan of Rs350 crore against shares but only repaid Rs142 crore. HDFC Bank says the remaining balance loan amount of Rs208 with Rs38 crore interest remains unpaid.
Another FIR has been registered by central crime station, Hyderabad police, for defrauding IndusInd Bank to the tune of Rs137 crore and one more FIR has been registered by the cyberabad police, Hyderabad, for defrauding ICICI Bank to the tune of Rs562.5 crore.
In 2019, IndusInd Bank had granted a loan of Rs185 crore to KSBL on depositing securities and guarantees. However, the broking company failed to repay the loan. It was alleged that KSBL illegally transferred Rs138 crore to other companies.
KSBL, under the leadership of C Parthasarathy, had committed gross irregularities and all the illegally taken loans have become non-performing assets (NPA). It is learnt that more FIRs are being registered by other banks and also individual shareholders and investors. The total loan proceeds taken from multiple banks using the same modus operandi is around Rs2,873 crore, a statement issued by ED on Saturday said.
The National Stock Exchange (NSE) and the Securities and Exchange Board of India (SEBI) are also investigating the affairs of KSBL. The ED is conducting an investigation under PMLA against Karvy group of companies for their involvement in the offence of money laundering to the tune of Rs2,873 crore.
During the course of the investigation, it came to light that KSBL did not report the depository participatory (DP) account no 11458979, named Karvy Stock Broking Ltd (BSE) in the filings made from January 2019 to August 2019 with the regulator and exchanges.
Further, KSBL fraudulently transferred shares belonging to its clients to its own demat account (which is not disclosed to the exchanges) and pledged the shares held in these accounts with lenders and banks like HDFC Bank, ICICI Bank, IndusInd Bank, and Axis Bank.
The securities lying in the DP account of KSBL actually belonged to the clients who are the legitimate owners of the pledged securities. Therefore, KSBL did not have any legal right to create a pledge on these securities and generate funds. The quantum of such loans taken by KSBL from the illegal pledges of shares is to the tune of Rs2,873 crore.
KSBL credited the funds raised by pledging of clients' securities to six of its own bank accounts (stock broker-own account) instead of the 'stock broker-client account' and, further, has not reported these six of its own bank accounts held with various private banks, to SEBI.
Prima facie, a net amount of Rs1,096 crore was transferred by KSBL to its group company, i.e., Karvy Realty (India) Ltd (KRIL), from 1 April 2016 to 19 October 2019.
Further, KSBL did large-scale trading activities in the name of nine companies that included Karvy Consultants Ltd (KCL), which is a group company of Karvy, and eight other shell companies, in the guise of doing insurance business.
During the course of the investigation conducted under PMLA, it also came to light that several crores of rupees were diverted for acquiring immovable properties through the group company, KRIL, and to other group companies as well.
It also came to light that recently deletion of files and emails from the computer servers by using anti-forensic tools had been done, under the instructions of C Parthasarathy. The bank statement analysis of these companies revealed that there is a large value rotation of funds between the Karvy group of companies and the shell companies' bank accounts.
Further investigation is in progress.
In November 2019, SEBI banned KSBL over client defaults worth Rs2,000 crore. The company was banned from taking on new clients and executing trades for existing customers.
This followed an investigation by NSE which found that Karvy had allegedly sold clients stocks pledged with it through associated entities. The regulator had told depositories not to act on any instructions by KSBL on the basis of powers of attorney given to the brokerage house in order to prevent further misuse of clients's securities.