ICICI Bank has filed a case against Karvy Stock Broking Ltd (KSBL) and its founder promoters C Parthasarathy and Meka Yugandhar Rao for allegedly defaulting the Bank to the tune of Rs563 crore.
According to a statement released by Cyberabad police, a case is registered under Sections 406 (criminal breach of trust), 420, read with Section 34 (cheating) of Indian Penal Code (IPC) at Gachibowli Police station against the three for cheating and criminal breach of trust.
According to the police, the case was booked after a manager from ICICI Bank approached them with a complaint alleging cheating and criminal breach of trust by the brokerage and its top executives.
Karvy Stock Broking had raised the funds by pledging shares of its six bankers. These funds were then supposedly transferred to the firm’s personal bank account instead of the stock broker client account.
This move was in contravention of the guidelines put in place by the Securities and Exchange Board of India (SEBI), according to the release. Additionally, all the pledges on securities were closed without approval and securities were transferred to the end clients of Karvy Stock Broking. This severely impacted the security of all lenders involved, including ICICI Bank, the press release said.
In its circular, SEBI had directed that clients’ securities lying with trading members or clearing members cannot be pledged to banks or non-banking finance companies (NBFCs) for raising funds. SEBI also specified that the broker should maintain clear segregation of client beneficiary account and its beneficiary account.
It has been contended that KSBL, with the alleged dishonest and fraudulent intent of cheating and criminal conspiracy, had misappropriated the financial assistance for their personal benefit, causing a breach of trust and wrongful loss to ICICI Bank and wrongful gain to the company and its management.
A case has been registered and transferred to the economic offences wing (EOW), Cyberabad following the complaint and a special team has been formed to investigate the case.
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.
Two other banks had also complained KSBL but, for now, the police have taken action only in connection with the case registered on IndusInd Bank's complaint.
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.
As reported by Moneylife in September last year, a set of lenders—HDFC Bank, ICIC Bank, Indusind Bank and Bajaj Finance Ltd had allowed Karvy to borrow money by pledging clients’ shares, putting the investment of over 90,000 investors at risk.
Last month, during the monsoon session, while responding to a question on the Rs2,500 crore Karvy scam, Pankaj Chaudhary, minister of state for finance had said, “Securities and Exchange Board of India (SEBI) has already passed orders in the matter of Karvy Stock Broking and initiated action against directors and key management personnel (KMP) of KSBL.
"In addition, adjudication proceedings have been initiated against both NSE and BSE for violating provisions of SEBI circulars. This is in addition to the criminal complaints filed by the NSE and its declaration of the broker as a defaulter. Claims of investors have been invited through a public notice.”
In November 2019, the market regulator 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 the National Stock Exchange (NSE) which found that Karvy had allegedly sold client stocks pledged with it through associated entities. The regulator had told depositories not to act upon any instructions by KSBL based on powers of attorney given to the brokerage house to prevent further misuse of client securities.
However, as reported by Moneylife, even several months after its expulsion, there was no legal action against Karvy by retail or institutional investors. Mr Parthsarathy has been assuring people that the brokerage was close to selling its data management business, Karvy Data Management Services Ltd (KDMSL) and expected to raise almost Rs1,000 crore.
Some large investors contemplating litigation against Karvy were told that litigation and any coercive action would scuttle the deal and eliminate any chances of investors getting their money back.
Responding to Moneylife query about Karvy negotiations to sell the data management company, NSE had said, "Karvy has, for more than a year, claimed that they have finalised a deal with UK-based non-resident Indian (NRI) to gain full control of KSBL associate, subsidiary company KDMSL but we are not aware of the current status. However, NSE and other exchanges have monetised trading and demat accounts of Karvy. NSE, jointly with other MIIs (market infrastructure institutions), completed the transfer of the trading and demat accounts of Karvy to another stockbroker and depository participant, through a formal bidding process.”
Karvy Stock Broking Company, located in the financial district at Gachibowli, and promoted by C Parthasarathy, M Yugandhara Rao and MS Ramakrishna, was a member of National Stock Exchange (NSE), Bombay Stock Exchange (BSE), Multi Commodity Exchange of India (MCX) and Metropolitan Stock Exchange of India (MSEI) and a depository participant registered with National Securities Depository Ltd (NSDL) and Central Depository Services (India) Ltd (CDSL).