Karvy Broking Case: Why Investors May Not Be Able To Seek Recourse From Investor Protection Fund
Investor clients of the broking outfit may not be able to seek recourse from the NSE’s investor protection fund. Read to know why.
Retail investor clients of Karvy Stock Broking Ltd., which allegedly sold clients’ securities illegally and used the money for its own purposes, may not be able to seek recourse from the National Stock Exchange’s investor protection fund unless the bourse declares the broking outfit to have defaulted.
That’s according to JN Gupta, founder and managing director of the proxy advisory firm Stakeholders Empowerment Services. The transaction didn’t take place on the exchange platform so it’s not clear how investors will be compensated in case the payout isn’t completed, he told BloombergQuint in an interaction.
The NSE compensates individual investors up to Rs 25 lakh from the investor protection fund in cases of default or if the exchange expels the broker. But that’s dependent on the exchange pronouncing the member in question as defaulter or expelling him/her. To be sure, Karvy hasn’t defaulted on any trade settlement. It has delayed payout to certain investors who approached the exchange and the SEBI, leading to an interim order from the market regulator. NSE is also conducting a forensic audit of the broking firm.
The Securities and Exchange Board of India last week barred Karvy from accepting new clients while permitting operations with its existing clients. It also asked depositories to monitor the movement of securities into and from depository accounts of Karvy’s clients to ensure client operations aren’t affected. In addition, it has asked National Securities Depository Ltd. and Central Depository Services Ltd. to not honour Karvy’s instructions in case of trades involving the power of attorney of a client.
Karvy, according to the SEBI, moved clients’ pledged shares to its own account via off-market deals and transferred an amount of Rs 1,096 crore to its group company, Karvy Realty Pvt. Ltd., between April 1, 2016 and Oct. 19, 2019.
The process of allowing trading members to perform clearing operations was undertaken to attain certain benefits, but this route has been misused, said Gupta.
The broking entity, however, denied the allegation. “We’re of the firm belief that the investments made through owned funds of the group and borrowings other than the pledge of securities were fully compliant with the relevant provisions and directives of the regulator during the period that they were made,” Karvy said in an emailed statement.
It also said it will be providing “detailed explanation and clarifications to SEBI as required”. “There’s no instance where there has been mis-utilisation of client securities.”
The market regulator said Karvy’s clients having queries over normal operations of their depository participant accounts may approach the depositories to get their queries addressed.
What Must Investors Do
It’s time for investors to scrutinise their accounts, according to Anuj Shah, director of Tracom Stock Broking Ltd., ensuring that they have received the required shares or money. “The depository participant, depositories and the stock exchange have provided enough checks and balances for investors—in the form of transaction information that’s conveyed to investors as mobile alerts, emails and periodic statements,” he said. “But investors must use them.”
Those investors who don’t have open stock position can immediately seek transfer of securities to a different depository participant, Shah said, adding it’s a one-day process. “And those (accounts) where money is involved, (investors) can ask for payout, so that the money gets transferred to their bank accounts.”
The new SEBI guidelines for handling of client money and securities doesn’t allow for creation of pool account—or one that pools all money from clients. Brokers are required to segregate securities and money to distinguish client accounts from theirs.
Meanwhile, payment for trades which were executed on Friday were executed successfully, an executive at the National Stock Exchange told BloombergQuint on condition of anonymity.
Brokers that BloombergQuint spoke to said trading members shouldn’t be allowed to undertake clearing operations. A lot of risk-averse clients already do the simple task of having their demat account, or depository participant account with a bank-based brokerage while trading with other brokerages, Deven Choksey of KR Choksey said, adding the market regulator should explore having well-capitalised bank custodians do the job of clearing trades and settlement.
Watch | JN Gupta and Anuj Shah discuss the Karvy Broking case