There’s hardly a day between one high-value scam and another. While shock waves of the Punjab & Maharashtra Cooperative Bank scam are still to die down, news of market regulator SEBI having banned Karvy Stock Broking from taking on new clients and executing trades is now roiling the financial markets.
SEBI’s ban came after a preliminary probe by the National Stock Exchange (NSE) showed that Karvy, a broking house and financial services company, had been pledging and selling some of its clients securities without authorisation.
The funds raised were being used by Karvy group companies, including its real estate arm. The modus operandi seems to be the unauthorised use of power of attorney granted by clients to Karvy to execute trades.
Nervous retail investors are already shifting their portfolios from Karvy-type brokerages to bank-owned broking houses. Banks too are shaky of impending defaults as Karvy companies have borrowed nearly Rs 3,000 crore from them.
About Rs 2,000 crore is under the NSE scanner, and more is likely to tumble out as the probe moves ahead.
Karvy is not only liable for criminal action for impersonating its clients and for cheating, it has also violated SEBI’s June 2019 notification banning brokers from raising funds by pledging clients’ shares.
For a broker to violate a client’s trust is inexcusable; besides, these Karvy-style deals have the makings of a Ponzi scheme which, if not nipped in the bud, can spread contagion in the financial markets.
Exemplary punishment of the severest kind is called for, and Karvy as a brokerage should not be allowed to trade again. It also calls into question the SEBI’s regulatory mechanisms.
This is not the first instance. Brokers bamboozling their clients is well known, and SEBI has barred Unickon Securities for 10 years in 2016 and Kassa Finvest in 2015 for misuse of client securities and defaulting in payouts to its clients.
Why is it that only when the corruption trail becomes too long to ignore that the regulators step in? Market intelligence can easily be used in time to stymie these violators.