The recent Securities and Exchange Board of India (SEBI) order on Karvy Stock Broking Ltd citing misuse of clients’ funds may take a fresh twist, and put banks under scrutiny.
Karvy pledging client shares to raise money could be against the prudential banking norms as lenders aren’t allowed to lend over `20 lakh against shares, sources said. However, if the said shares are packaged under a basket of other collateral including say land or some such security, there won’t be any upper limit to lend.
“Banks giving loans against shares without verifying the ability of the borrower offering such collateral without sufficient resources raises serious issues. If banks extended loans against security only to realise that the collateral includes only shares, that could be a problem,” a banking industry analyst told this publication.
Karvy said, “There is no instance where there has been misutilisation of client securities,” it said. The firm said it will provide a detailed explanation and clarifications to SEBI as required. It added that as per prior SEBI directives, it used to pledge shares as was the standard practice across broking houses. “...But following the issuance of fresh directives in 2018-2019, we have commenced the process of reducing the quantum,” Karvy noted.
On Friday, SEBI issued an interim ex parte order against Karvy restricting it from opening new trading accounts. According to the Sebi order, Karvy raised money pledging clients’ shares and transferred it to its own account. A total of Rs 1,096 crore was transferred by Karvy to its group company, Karvy Realty Pvt Ltd. Just last week, several investors complained about payout delays and requested the government and SEBI to intervene.
Coming down heavily, the markets regulator said the unauthorised use of clients’ funds creates a serious doubt over the conduct and integrity of Karvy. It also noted that Karvy sold excess securities worth Rs 485 crore through 9 related clients till May 31, 2019 and transferred excess securities to 6 of these 9 related clients to the tune of Rs 162 crore till May 31, 2019.
It was observed that securities worth Rs 257.08 crore, pledged on behalf of 4 clients out of the aforesaid 9 clients, were unpledged between June 1, 2019 and August 22, 2019 and securities worth of Rs 217.85 crore was recovered by Karvy from 4 of 9 client accounts. It also purchased securities in 5 out of 9 client accounts amounting to Rs 228.07 crore.
‘Carefully perusing the interim order’
Karvy CMD C Parthasarathy sent a missive to employees denying allegations of a Rs 2,000 crore fraud. “There’s no excess transfer of stocks to any of the clients and any stocks, if erroneously transferred, have already been recovered from the respective clients,” he further said.