Hyderabad-based stock broking firm Karvy raised Rs 600 crore by pledging clients' securities worth Rs 2,300 crore with three private banks and a large non-banking finance company.
Karvy Stock Broking Ltd (KSBL) pledged securities of almost 95,000 clients as collateral to raise loans worth over Rs 600 crore, The Economic Times quoted two persons as saying.
Karvy, one of the largest retail brokerage houses in India, has been facing several investor complaints about broker misusing clients' stocks and funds. The Securities and Exchange Board of India (Sebi) is investigating the case.
If the broker is declared a defaulter, investors will get their money back via Investor Protection Fund. However, the compensation is limited to Rs 25 lakh per investor per defaulting broker.
Last Friday, Sebi banned Karvy Stock Broking from taking on new clients and existing customers with immediate effect over the alleged misuse of clients' securities worth around Rs 2,000 crore. The action followed National Stock Exchange (NSE) forwarding a preliminary report to Sebi on the non-compliances observed with respect to the pledging/misuse of client securities by Karvy.
Sebi in its preliminary report mentioned that an inspection by NSE revealed that KSBL sold excess securities to the tune of Rs 485 crore through 9 related clients till May 31, 2019. Further, KSBL also transferred excess securities to 6 out of these 9 related clients to the tune of Rs 162 crore till May 31, 2019, Sebi said in its report.
The regulator has directed National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) to not honour Karvy's instructions where clients' power of attorney (PoA) trades are involved. PoA is a regular practice that authorises the broker to debit the shares directly from the client's demat account to settle a trade.
In a separate development, the NSE has appointed Ernst & Young (EY) to conduct a forensic audit of Karvy Stock Broking.
Commenting on Sebi order, Karvy Group Chairman C Parthasarathy has said that the company has around Rs 25-30 crore worth of outstanding dues to less than 200 clients. He said the company would clear the dues to these clients in a fortnight or even lesser time.
Edited by Chitranjan Kumar