Karvy delays payouts to 95,000 retail customers

Around 95,000 clients of Karvy Stock broking Ltd, almost all of them retail investors, are staring at uncertainty as they wait to regain access to their shares and receive payouts from the broking firm.

While customers can typically change their broker by opening an account with a rival brokerage by obtaining a client master report and initiating a closure-cum-transfer request, several of Karvy’s clients have alleged that the firm is deliberately delaying payouts and preventing them from moving to another broking firm.

“Karvy is not moving shares from the pool account to DP Holding (demat account). Only when these transfers happen can we start trading with another brokerage firm,” a Mumbai-based investor said on condition of anonymity. “Not just that, payout requests are also not being honoured, purchased securities are also not being delivered in the demat account of investors.” he alleged.

Some more investors, who spoke to Mint, said several complaints have been lodged against Karvy with markets regulator Securities and Exchange Board of India (Sebi) about this issue and action in this regard is awaited.

A 22 November Sebi order barred the firm from taking on new clients and trading on behalf of existing investors. The order, however, did not restrict the firm from making timely payouts to investors.

Deepesh Kumar, a Mumbai-based client of Karvy, shared a similar experience: “Regulators should ensure that money in trading accounts of clients are transferred to clients’ linked bank accounts. According to Sebi’s broker regulations, quarterly transfers are required to be made from the pool account to clients’ accounts even if clients have not made such a request.

“Karvy may misguide the regulators by falsely claiming that clients have not initiated requests for refund.”

The Sebi order came after it was found that the broking firm had used client stocks to raise funds and transferred them to other group businesses. The total misappropriation, according to the preliminary findings of the National Stock Exchange of India (NSE), which conducted an audit, stands at ₹2,000 crore, making it one of the largest defaults by a stock broking firm in India.

Currently, Karvy has close to 244,000 clients, a large chunk of which are retail investors with investment size ranging from a few thousand rupees to a crore.

“Investors are unfortunately at the receiving end of this scam as they are unable to withdraw funds or transact in securities that rightfully belong to them. This is akin to robbery of their savings and investments,” said Shriram Subramanian, founder and managing director of InGovern Research Services Pvt. Ltd, a corporate governance firm. “Also, there is uncertainty on the scale of this scam by Karvy. It is also highly likely that many other broking firms are adopting such crooked practices.”

Industry watchers say the most problematic transactions, which could create hurdles for investors, involve those where stocks worth ₹1,096 crore were sold and proceeds transferred to Karvy Realty, a group company. These transactions are the focus of a forensic audit being done by EY India Ltd as ordered by NSE.

Karvy, on its part, is promising investors to make the payouts soon, asking them to remain patient. In an emailed response, a spokesperson for Karvy said the company will make a payout of ₹25 crore to 200 clients, due under Sebi regulations, in two weeks.

However, the Karvy group is facing liquidity issues, which may make it harder for it to meet payment obligations. The liquidity problems for the firm started with its commodity broking business in the third week of November when it delayed payouts to some of its clients for 10 days or more.

Rating agencies Icra Ltd and Crisil Ltd have downgraded the stock broker and bank facilities of its group businesses.

Icra on Wednesday downgraded two instruments of Karvy Stock Broking on the basis of a recent Sebi interim order.

Meanwhile, the broking firm on Thursday filed an appeal in the Securities Appellate Tribunal against Sebi’s interim directions.

How Sebi cracked Karvy’s misuse of clients funds

Sebi’s late Friday order against Karvy Stock Broking Limited (KSBL) is a result of a nearly year-long investigation by the markets regulator. The probe was launched after investor complaints about brokers misusing clients’ stocks and funds. Starting December 2018, Sebi had been changing rules and ordering new reports from stakeholders in the market, which was making it increasingly difficult for brokers to use clients’ stocks and securities for their own use, sources said.

“All these steps (by the regulator and the exchanges) are aimed at investor protection,” a top exchange official said. The way the investigation is progressing, sources said, more names are set to tumble out in the open and some well-known broking houses could face a similar heat like KSBL is facing now.

In December last year, Sebi first standardised books and records maintained by brokers so that inspection and comparison of data could become easier. The move came after investor complaints that some brokers were not transferring shares and money to the designated demat and bank accounts of investors. Then, in January 2019, Sebi directed all brokers to report day-wise stock and fund balance with them, segregated according to their clients. This was to be reported at the end of every week.

Between March and April, Sebi also started matching records of ownership of stocks that’s with the exchanges, with the brokers and that with the two depositories NSDL and CDSL. Around the same time, the regulator also started tallying details of pledged shares with depository records and what the brokers disclosed.

Then in a June 20 order, Sebi stopped all brokers from raising funds by pledging clients’ shares, and also ordered segregation and reporting of clients stocks and funds from those owned by the broker. This was one of the main moves that many market players said would, over time, expose those brokers who were having a field day by using clients’ stocks for their own use.

All the brokers were asked to report compliance with Sebi’s June 20 order about segregation rules by August 31. However, after requests from brokers, the date was extended to September 30.

SEBI expresses concerns over 35% minimum shareholding plan

The SEBI panel is yet to take a final decision, the report said.
Majority members of a SEBI committee have expressed concerns over the government's plan to raise minimum public shareholding, according to a report in The Economic Times.

Finance Minister Nirmala Sitharaman in the Budget had proposed that the minimum public shareholding for listed companies be raised to 35 percent from 25 percent.

The 24-member committee, led by former Infosys CFO Mohandas Pai, is yet to take a final decision, the report said.
"There were numerous thoughts on the proposal. There have to be more discussions before forming any view," a source told the paper.Current market conditions, inability of state-owned companies to comply with the mandatory 25 percent minimum public shareholding, potential flight of capital and disadvantages for listed MNCs were some of the complaints raised, the report said.

The government's move intends to improve weightage of Indian companies on global indices. Currently, India's weight has been limited due to higher promoter holdings.

"If you want liquidity in the market, you must increase the free float of shares rather than just look at a broad increase in percentage," a source told the paper.
The source also questioned the rationale behind the plan, given that the limit is 25 percent in most countries.

Tata Consultancy Services, HDFC Life and Avenue Supermarts are some of the large companies where promoters will have to sell some of their shares in the market.