On 8 March 2022, the enforcement directorate (ED) at Hyderabad issued a provisional attachment order under the Prevention of Money Laundering Act (PMLA) against C Parthasarathy, founder of the Karvy group of entities, his sons Adiraj Parthasarathy and Rajat Parthasarathy, and the following key entities of the group: Karvy Stock Broking Ltd (KSBL), Karvy Realty (India) Ltd (KRL), Karvy Financial Services Ltd (KFSL), Karvy Data Management Services Ltd(KDMS), Karvy Consultants Ltd (KCL), M/s Adhirajat Commercial Enterprises Pvt Ltd, Adhirajat Holdings and Compar Estates and Agencies Pvt Ltd.
The order follows an extremely detailed and meticulous investigation that says it has also taken into account findings of the investigations conducted by the National Stock Exchange (NSE) and the Serious Frauds Investigation Office (SFIO). In the process, the investigation agency has identified scores of companies, subsidiaries and shell companies of the group and estimated the value of assets held by the Karvy founder, his family and group entities at Rs1,984.84 crore (see table).
Over 52 persons were interrogated, including the five key officials arrested along with founder chairman C Parthasarathy and remain jailed, the chief executive officer (CEO), chief financial officer (CFO) and company secretary and head of compliance. Their disclosures and confessions allowed the investigators to create flowcharts of how investors’ funds were diverted by KSBL to create a layering effect and then misused in many ways. Karvy had raised the funds by illegally pledging the shares of 250,000 investors by transferring them to a demat account that was not disclosed to the Exchange or the regulator.
Here is the story documented by the ED order, in a nutshell. KSBL was in business for 30 years and has always borrowed funds for working capital, margin financing and extending credit to investors against their shares held by it. The problem arose after 2013-14 when it began to divert funds raised by illegally pledging clients’ shares to a set of insurance broking companies within the Karvy group. These companies used the diverted money as margin funds to trade heavily in their own accounts and ran up huge losses which needed to be covered up. KFSL, a non-banking financial services entity, had accumulated losses and its non-performing assets (NPAs) accumulated over the years. C Parthasarathy tried to hive it off after increasing its valuation by pumping in illegally borrowed money. This only led to further losses.
Money was also diverted to family members who were paid lavish salaries and expenses without doing any work. Curiously, C Parthasarathy alone has been arrested while his family has only been questioned. To many, it is a reminder of how Ramalinga Raju’s confession in Satyam Computers had protected the rest of the family.
The ED alleges that the entire Karvy fraud was run by a ‘cabal’ of key executives who were called “Parthasarathy’s Secretariat Section” and had back-office control. The attachment order, however, documents Mr Parthasarathy’s claim that his officials kept him in the dark about trading losses.
Compiling a series of complaints and first information reports (FIRs) filed by lenders, investors and others, ED estimates the fraud by KSBL at Rs1,922.42 crore, broken up as below:
Even accounting for some fanciful over-estimation and the fact that significant value would be irrecoverable in a defunct group, the ED’s investigation shows that significant money could have been salvaged through quick regulatory action.
It raises serious questions about why our powerful capital market regulator, armed with powers to search, seize, raid and even arrest people, has not made similar discoveries or moved to attach Karvy’s properties even a year after its interim order of 22 November 2019.
Investor protection is the primary task of the Securities and Exchange Board of India’s (SEBI), even ahead of market regulation. Unlike stock exchanges, SEBI has been empowered by statute to do all that it takes. Yet, SEBI’s track-record shows that it fails to go beyond ordering forensic audits, whether it is a big broker default like Karvy, the co-location (Colo) scam of 2015 or dodgy disclosures by listed entities.
The contrast becomes starkly evident as one peruses the ED’s attachment order served on 30 entities, including the Parthsarathy family (together with sons Rajat and Adhiraj Parthasarathy), important family firms (M/s Adhirajat Commercial Enterprises Pvt Ltd, Compar Estates and Agencies Pvt Ltd and Adhirajat Holdings), key subsidiaries (mentioned above) and the bunch of shell companies that were originally registered as insurance brokers but were used to divert and layer funds and for stock market trading. These shell companies, central to the fraud, are: Advanced Financial Services, Buoyant Insurance Services Pvt Ltd, Champion Insurance Services, Classic Wealth Management Services, First Mercantile Wealth Advisory Services, Pelican Wealth Advisory Services, Nova Consultants, Vitalink Wealth Advisory Services, Ultimate Insurance Services Pvt Ltd, Wizard Insurance Services Pvt Ltd, Zenith Insurance Services Pvt Ltd, Citadel Wealth Advisory Services, Suranj Consultancy Services and Nova Wealth Management Services.
Five key lenders—HDFC Bank, ICICI Bank, Axis Bank, Aditya Birla Finance and Bajaj Finance that extended loans against properties to KSBL—are also included in the notice. The ED order shows that KSBL’s corporate office—Karvy Millennium (estimated value Rs65.67 crore)—was pledged to Aditya Birla Finance and Karvy House at Banjara Hills (estimated value Rs25.47 crore) was pledged to Axis Bank, while a series of flats, estimated at over Rs13 crore, were pledged to HDFC Bank. The attachment documents scores of others claims, lenders and assets, based on the FIRs that each has filed.
While all the ED’s charges will be strongly litigated by the group, which already has multiple proceedings before different forums, the key finding by the ED, to my mind, is the number of entities that were spawned by each of the main Karvy group entities to create layers and camouflage the flow of funds for market operations and investment in realty.
Here is a look at the subsidiaries of each key entity. The ED notes that the brokerage firm KSBL alone had 15 subsidiary entities listed in the table below.
2.Karvy Consultants had nine subsidiary entities:
3.KDMSL, the valuable data management company, had seven entities under it which were also used to divert funds.
4.Then there were nine family firms belonging to C Parthasarathy.
5.There is also a list of 17 shell companies floated by the Karvy group, which include eight entities mentioned in SEBI orders partly overlapping with the 14 insurance broking entities used for market operations, and a few more, such as Blue Planet Housing Infrastructure, Heartlands Infrastructure and Meteor Infrastructure & Projects, which were clearly for the realty play.
Unfortunately, all this is cold comfort for investors, since the ED action does not bring them any close to getting their own money back from Karvy. Timely action by the market regulator may, however, have ensured a better deal for them.
For the record, SEBI has done only two things to benefit Karvy investors. The first on 2 December 2019 when it ordered the National Securities Depository Ltd (NSDL); to return shares illegally diverted by KSBL (via an undisclosed demat account) to investors who were their rightful owners. This saved about 82,000+ investors (out of around 90,000 whose shares were pledged) from being frozen and caught in endless litigation by lenders (Read: Karvy Default: For Once SEBI Acts Quickly To Protect Retail Investors’ Interest). For an entire year after that, SEBI did nothing, while Karvy’s founder C Parthasarathy repeatedly bought time from the Exchange and the regulator with the promise to bring in at least Rs1,000 crore by selling KDMS. It was only at the end of November 2020, that NSE finally expelled KSBL (NSE Expels Karvy Stock Broking; Declares It as Defaulter) making it the largest broker default on the Exchange.
In April 2022, SEBI imposed tiny penalty of Rs3 crore on the Bombay Stock Exchange (BSE) and Rs2 crore on NSE, for their ‘laxity’ in failing to detect the fraudulent transfer and sale of Rs2,300 crore of shares belonging to more than 95,000 investors. Curiously, in mid-November 2020, NSE had issued a statement to say that “funds and securities of approximately Rs2,300 crore belonging to about 2,35,000 investors have been settled so far, with efforts focused on settlement of small investors. Investors with fund balances up to Rs30,000 due from Karvy Stock Broking have been settled.”
Most of the cases are slam dink, but our courts and convuluted laws and delay tactics and judges preponderance to wait for 100% facts lets more criminals out and does not support victims. Ban on bails for serious cases and stringent punishments for an iota of truth would ensure justice even if it incarcerates a few people
SEBI may not have 'officers' with police powers to do it to Karvy what ED did, but it has no intention of setting BSE/NSE right either. In one of the broker defaults, a friend of mine was paid only 90k instead of 450k by BSE and NSE did not pay a paisa out of 40 L. check PMOPG/E/2020/0593937 on https://pgportal.gov.in/Status using [email protected] as email.
SEBI is the problem. Everytime the govt. creates an institution to enforce laws or do anything eventually the purpose of the institution becomes to perpetuate it's own existence or provide post retirement salaries for Babus. I have tried complaining to SEBI several times about a company not honouring NCDs. SEBI refused to act.
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The contrast becomes starkly evident as one peruses the ED’s attachment order served on 30 entities, including the Parthsarathy family (together with sons Rajat and Adhiraj Parthasarathy), important family firms (M/s Adhirajat Commercial Enterprises Pvt Ltd, Compar Estates and Agencies Pvt Ltd and Adhirajat Holdings), key subsidiaries (mentioned above) and the bunch of shell companies that were originally registered as insurance brokers but were used to divert and layer funds and for stock market trading. These shell companies, central to the fraud, are: Advanced Financial Services, Buoyant Insurance Services Pvt Ltd, Champion Insurance Services, Classic Wealth Management Services, First Mercantile Wealth Advisory Services, Pelican Wealth Advisory Services, Nova Consultants, Vitalink Wealth Advisory Services, Ultimate Insurance Services Pvt Ltd, Wizard Insurance Services Pvt Ltd, Zenith Insurance Services Pvt Ltd, Citadel Wealth Advisory Services, Suranj Consultancy Services and Nova Wealth Management Services.
High time every asset should be sold off and pay every people. The employees are also not been paid months and months of salaries.