Karvy Stock Broking Ltd (KSBL) was expelled by the National Stock Exchange (NSE) on 22nd November—a whole year after the market regulator, Securities and Exchange Board of India (SEBI) had suspended its operations and barred it from taking on new clients. KSBL had illegally transferred and pledged investors’ shares and diverted money to a realty firm.
This action comes just three years after KSBL had paid Rs6.8 lakh to settle —action that followed a SEBI inspection between April 2011 and November 2012 which threw up several lapses including non-compliance in handling clients’ funds. SEBI found that Karvy “did not observe high standards of integrity and fairness in conduct of business.” And, yet, SEBI’s ‘high-powered committee’ allowed the settlement.
Shouldn’t KSBL and the Karvy group have been under greater regulatory scrutiny after they were allowed this ‘pay and get away’ facility? What about the applicability of ‘fit and proper’ norms to a firm that held investors’ power of attorney (PoA) to transfer shares and funds?
The Karvy group has got away for too long by delaying punitive action by filing appeals and using the interim period to weaken charges and to lobby for settlement or a lesser charge.
This time, too, both NSE and SEBI gave it a very long rope. Just three months ago, when NSE initiated action against Anugrah Stock & Share Broking, its officials justified the time given to Karvy arguing that the group’s assets far exceeded its liabilities. Were the assets non-existent?
In the 2003-2005 period, Karvy was among the key players indicted in what is called the ‘IPO scam’ or the multiple applications scam, along with the National Securities Depository Ltd (NSDL). The investigation into over 100 IPOs (initial public offerings) unearthed evidence of fraud in 21 IPOs. A bunch of market intermediaries colluded with a set of shady operators (Rupalben Panchal being one) to make multiple applications under fictitious names and collude with investment banks and bankers to corner massive IPO allotments.
Once shares were allotted to the fictitious fronts, they were consolidated into a few demat accounts at the share depositories before the shares opened for trading; this gave them a huge profit on listing. NSDL and CDSL (Central Depository Services India Ltd) either turned a blind eye or did not have the systems to detect fraud. SEBI’s IPO scam order had accused the entire Karvy group, comprising KSBL, Karvy Consultants Limited, Karvy Computershare Private Limited, Karvy Securities Ltd and Karvy Investor Services Limited, of having facilitated and abetted key operators at every stage—from filing applications to obtaining bank credit to buy shares, to consolidating them after allotment and obtaining refunds.
During CB Bhave’s tenure as the SEBI chairman, the regulator rapidly allowed all the smaller players to ‘settle’ their cases and close them with a fine. But Karvy’s case dragged on until 2014, when SEBI finally barred KSBL from taking up any new primary market assignments for six months.
Karvy filed an appeal and obtained an immediate reprieve from the Securities Appellate Tribunal (SAT). Last heard, SAT set aside the SEBI ruling on 21 January 2015 and asked the regulator to pass fresh orders in four months. There is no information on action after this, barring the ‘settlement’ by Karvy in 2017. Is the matter still pending? Nothing seems to come up in web searches.
It is a marvel of our regulatory system that SEBI neither kept it under close scrutiny, nor applied the ‘fit and proper’ criteria to Karvy, despite the huge fiduciary responsibility involved in all its roles as market infrastructure intermediaries. KSBL alone had over 12 lakh investors and held PoAs controlling a chunk of their savings and investments.
Two years later, as complaints against KSBL for not transferring and releasing shares began to mount, NSE and SEBI finally chose to act against what was essentially a heist of investors’ shares entrusted to KSBL’s fiduciary protection.
In a nutshell, KSBL had pledged clients’ shares worth Rs2,300 crore with four major lenders to raise Rs600 crore. The lenders did not bother to check if Karvy owned the shares. Further, it had illegally transferred Rs1,096 crore to Karvy Realty Private Limited, a group company, between 1 April 2016 and 19 October 2019.
And, yet, SEBI, as market watchdog, had allowed Karvy to settle a case that involving similar dubious deals in 2017 at a much smaller scale. Isn’t it pertinent to ask who in SEBI recommended the settlement and the names of the high-powered committee members who approved it without asking for closer supervision?
As I said earlier, NSE and SEBI gave Karvy a whole year to liquidate assets and bring in money to be paid to investors. On 22nd November, exactly a year to the date that market regulator had suspended KSBL for misuse of client funds (among other things), NSE finally declared the firm a defaulter and expelled it from the market.
So what happened to Karvy’s assets that NSE was confident about? Were they fictional? The group sold its profitable R&T (registrar & transfer) business to General Atlantic Singapore Fund Pte. Other than KSBL, Karvy’s website lists the following group companies, most of them regulated by SEBI: Karvy Comtrade (commodities broking), Karvy Capital Ltd (non-banking financial services –NBFC—& portfolio manager), Karvy Investment Advisory Services Ltd (formerly an insurance broker), Karvy Holdings Ltd (core investment company), Karvy Middle East LLC (wealth management for NRIs—non-resident Indians), Karvy Realty (India) Ltd, Karvy Financial Services Ltd (NBFC), Karvy Insurance Repository Ltd, Karvy Forex & Currencies Private Ltd, Karvy Consultants Ltd, Karvy Data Management Services Ltd, Karvy Investor Services Ltd, Karvy Insights Ltd, Karvy Analytics Ltd, Karvy Solar Power Ltd, Karvy Global Services Ltd, Karvy Global Services Inc, USA (into business process outsourcing) and Karvy Inc, USA. Does none of them have surpluses to bail out KSBL? And will any of these capital market businesses be impacted by KSBL’s expulsion?
Neither SEBI nor NSE has offered an explanation. Remember, KSBL had illegally transferred Rs1,096 crore to Karvy Realty; was it returned? We don’t know. On 18th November, NSE announced that it had paid a combined Rs2,300 crore to settle claims of nearly 235,000 investors whose shares or money were stuck with KSBL and everyone with an outstanding of up to Rs30,000 will receive their dues.
Even before NSE’s action, I have forwarded over 136 investor complaints to C Parthasarathy, Karvy group chairman, from the end of July until September. These were from investors who had responded to my query on Twitter. On 4th August, I received a detailed email and Excel sheet from Mr Parthasarathy about action in 91 cases, saying payments up to Rs20,000 had been cleared and shares transferred. Mr Parthasarathy wrote, “On the larger issue of refunding customers’ money. We have had a temporary setback, and there were delays. We have addressed most of the issues and are continuing to address the balance. We are also mobilising additional funds by divesting our holding in one of our subsidiary companies. There is no question of not returning investors’ money…”
On 4th November, in response to a follow–up, he wrote, “Almost everybody to whom we had to effect a second tranche of payments, have been paid. There are however a few cases where shares are yet to be credited” and promised to pay the rest. I received no further responses from Karvy or Mr Parthasarathy.
The upshot is that we still don’t know how many investors have not been paid and the amount involved. Neither SEBI nor NSE has provided details and Mr Parthsarathy is no longer responding to emails. In fact, even SEBI’s confirmatory order of 24th November only speaks of a forensic audit, without disclosing its findings. Why this secrecy? Why was the forensic audit so delayed and why don't we have even interim findings in the public domain? It is because it would embarrass the Exchange and the regulator?
Another question is about the adequacy of NSE’s investor protection fund (IPF). Despite a string of broker defaults, it is only recently that SEBI finally asked NSE to shore up the IPF from Rs594.12 crore to Rs1,500 crore (this is to happen on 26th November, with Rs300 crore as a reserve). Is this adequate to compensate Karvy’s investors even at Rs25 lakh each? We have no answers.
Unless policy-makers and parliament begin to question regulators or investors manage to get good court orders, their investments remain at the mercy of poor supervision.
If investors of Karvy, who have not received their money, would like help in creating a support group on Telegram, to understand the way forward for recovery of dues, application to Investor Protection Funds-IPF and, if necessary consider a joint litigation, Moneylife Foundation will be happy to create the group (as we have done for investors of Anugrah Stock & Broking and Sahara India).
However, Moneylife Foundation will create the group on Telegram only if we have a minimum of 25 responses from Karvy investors. Respond on this link