Here’s how the scam played out, BFSI News, ET BFSI
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What was the Karvy demat scam?
Hyderabad-based Karvy Group flagship Karvy Stock Broking (KSBL) pledged securities lying in the demat accounts of its clients, without their permission, to raise funds from multiple banks and financial institutions. These funds were then diverted into other Karvy group companies like Karvy Realty.
What was the magnitude of the scam?
Initial estimates showed that KSBL pledged securities of over 95,000 clients illegally and raised over Rs 2,300 crore via loans against shares (LAS) from multiple lenders like HDFC Bank, ICICI Bank, IndusInd Bank, Axis Bank, Bajaj Finance, Aditya Birla Finance.
How was the scam done?
The broking firm transferred shares from the demat accounts of its clients, which were not active, into its demat account named Karvy Stock Broking (BSE) and showed these stocks as its own securities to lenders as collateral for taking loans.
How and when was it unearthed?
On June 20, 2019, markets regulator Sebi came out with a circular on handling client securities which said that brokers could not pledge client securities to raise loans for themselves, which till then was an established market practice. Sebi had set a deadline of September 30, 2019, for brokers to segregate client funds and securities but when KSBL failed to do so by the given deadline, investors complained to Sebi, which then asked NSE to investigate the matter
What was the action taken by regulatory agencies?
On November 22, 2019, Sebi issued an order banning KSBL from broking services and said the firm had transferred Rs 1096 crore to group company Karvy Realty between April 2016 to October 2019. Sebi also asked NSE to conduct a detailed forensic audit while working closely with depository participants (DPs) and stock exchanges to quickly transfer some of the illegally transferred securities back into the accounts of investors. In January 2020, the Union corporate affairs ministry also ordered the Registrar of Companies (RoC), Hyderabad, to probe Karvy group financial fraud.
What about investor compensation?
In December 2019, soon after the scam came to light, Sebi worked with DPs and stock exchanges to transfer securities of nearly 83,000 out of the over 95,000 scam-hit KSBL clients from Karvy’s demat account back into their respective accounts. In November 2020, NSE said it had settled claims worth Rs 2,300 crore to around 2.4 lakh KSBL investors with fund balances of up to Rs 30,000. In early 2021, under directions from Sebi, KSBL’s demat accounts were auctioned off to IIFL Securities and its trading accounts were auctioned to Axis Securities as part of efforts to compensate investors.
Tracking the scam
2019
November 22 | Markets regulator Sebi issues exparte order banning Karvy Stock Broking Ltd (KSBL) from broking activities
November 26 | Karvy Group CMD C Parthasarathy resigns from board of Karvy Fintech, which later rechristens itself as K-Fin Technologies
December 2 | Under Sebi’s directions NSDL and NSE transfer securities worth around Rs 2,300 crore of nearly 83,000 clients of KSBL back into their accounts
December 2 | NSE & BSE suspend KSBL from all market segments for violation of compliance norms
December 4 | SAT turns down KSBL lenders plea to get back the securities that were transferred back to clients so that pledge can be invoked
December 14 | Sebi refuses relief to KSBL lenders
December 31 | Karvy Group kicks of corporate rejig and management reshuffle as damage control exercise; brings in Amitabh Chaturvedi as CEO of financial services business
2020
January | Union ministry of corporate affairs (MoCA) orders probe into Karvy Group affairs
August | Telangana high court dismisses writ petitions filed by Karvy Group challenging SFIO & RoC probes into financial affairs in wake of demat scam
November | NSE settles claims worth Rs 2,300 crore to around 2.4 lakh KSBL investors with fund balances of up to Rs 30,000
2021
February | Depositories and stock exchanges auction KSBL’s demat and trading accounts to IIFL Securities and Axis Securities, respectively
April | IIFL Securities starts activation of 11 lakh frozen Karvy demat accounts with assets under management worth Rs 3 crore that were held by NSDL and CDSL
August 19 | Karvy group chairman and promoter C Parthasarathy arrested by CCS of Hyderabad police based on loan default complaint by IndusInd Bank
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