The National Stock Exchange (NSE) has expelled Karvy Stock Broking Ltd (KSBL) from its membership, while declaring the brokerage as defaulter.
In a circular, NSE says, "...the member has been expelled from the membership of the Exchange under Rules 1 and 2 of the NSEIL Rules and has been declared as defaulter under provision 1(a) of chapter XII of Exchange bye laws from 23 November 2020 after close of marker hours."
In November 2019, without any authority, Karvy had transferred securities worth Rs2,300 crore of more than 95,000 clients, into its account, by misusing the power of attorney (PoA) given by its clients.
On 22 November 2019, SEBI (Securities and Exchange Board of India) barred Karvy from taking new clients in respect of its stock broking activities and also prevented it from using the PoA given by clients after the broker was found to have allegedly misused clients' securities. Karvy had, instead of pledging its own shares, pledged shares belonging to clients and utilised them to raise funds. Some of these funds were, in turn, transferred to its sister concerns such as Karvy Realty Ltd.
Karvy Stock Broking was disabled (trading rights withdrawn) on 2 December 2019.
What the NSE Action Means for Karvy Investor-Clients?
The action taken by NSE against Karvy Broking means that investors, who were kept hanging for all these months, now have a chance of applying to the NSE's Investor Protection Fund and receive at least up to Rs25 lakh from the IPF.
It is also interesting that Karvy has finally been declared defaulter only after SEBI ordered NSE to increase the corpus of IPF, under public pressure. Moneylife
has pointed this out repeatedly. (Read: SEBI Asks NSE To Increase its IPF Corpus to Rs1,500 Crore from Rs594 Crore at Present
The default by Karvy is estimated to be about Rs1,000 crore.
SEBI has also asked NSE to increase the size of its IPF corpus to Rs1,500 crore in order to protect the interests of investors in the light of the recent broker defaults. The adequacy of the IPF corpus will be reviewed on a half-yearly basis and incremental contributions will be made to the IPF, if required.
Accordingly, NSE has announced that it will enhance the total corpus to Rs1,200 crore by 26 November 2020. Further, Rs300 crore will be maintained as a reserve fund to be transferred to Investors Protection Fund Trust (IPFT) to meet any shortfall in IPF.
In the past couple of years, broker defaults have been on the rise and the IPF corpus would be grossly inadequate if every investor has to be paid. This is one of the main reasons both stock exchanges delay declaring brokers as defaulters, and have a cap of Rs25 lakh for each investor. Clients are allowed to claim money from stock exchanges only after a broker is officially declared a defaulter.
However, if the defaults of Karvy Stock Broking alone are worth over Rs1,000 crore, then the entire corpus of NSE's IPF would get wiped out.
Investors, who are panic-struck by the action by NSE have several questions for the market regulators. They want to know, what happens to the shares in Karvy's demat accounts and are they safe? But the shares in demat accounts ought to be unaffected.
Investors also are eager to know the status of the pool account shares and want to know if they can apply to NSE for money from IPF.
Last year on 2nd December, SEBI had asked National Stock Depository Ltd (NSDL) to transfer investors' shares that were pledged by Karvy Stock Brokers, back to their respective depository (demat) accounts.
The money involved is enormous-over Rs2,013.77 crore belonging to 82,559 investors. The remaining investors (of a total of approximately 90,000-95,000) would get their shares credited after paying what is due to KSBL. Simultaneously, SEBI escalated its action against KSBL by suspending its trading licence with immediate effect.
For the banks and corporates, who are crying foul, the money recoverable from Karvy is hopefully less than the value of shares pledged. Most of them would have multiple business relationships with C Parthasarathy, Karvy's promoter-chairman, and his group entities; so their ability to enforce their rights and recover dues is significantly higher. (Read: Karvy Default: For Once SEBI Acts Quickly To Protect Retail Investors' Interest
Last week, NSE said it has settled claims worth Rs2,300 crore of as many as 235,000 investors of KBSL. In a statement, NSE says, "While disciplinary proceedings are underway, 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." (Karvy Default: NSE Settles Claims Worth Rs2,300 Crore of 2.35 Lakh Investors; More Expected
"In coordination with other market infrastructure institutions (MIIs) and under the guidance of Securities and Exchange Board of India (SEBI), it transferred securities to respective clients, invoked bank guarantees deposited with clearing corporations and liquidated securities held by Karvy group companies," NSE had said.