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Karvy on the curvy roads

The calamitous events of Punjab and Maharashtra Co-operative Bank and Dewan Housing Finance Corporation led many to believe that it was picture Khatam Ho Gaya for the depression in India’s fiscal sector. But the developments at the-Karvy Stock Broking, Hyderabad, have demonstrated that picture Abhi Baki Hai.

Earlier, India has seen many evasions by brokers like Fairwealth, BRH Wealth Kreators, Guinness, Kaasa Finvest and Ficus Securities. Now it’s Karvy Stock Broking. Karvy’s act of misappropriating its clients’ shares to fund its real estate business has shaken India’s financial sector. The investors suffered a humongous loss in terms of money and trust. The episode shows that the promoters of the stockbroking company sidestepped rules to bypass the system. According to SEBI, Karvy Realty has been benefitted by this embezzlement by Karvy Stock and the theft is pegged at Rs 2800 crore.

Four major stock exchanges viz. National Stock Exchange, Bombay Stock Exchange, Multi Commodity Exchange and Metropolitan Stock Exchange of India have now decided to terminate their ties with KSBL in the segments of equity, commodity, and currency. With this, Karvy’s operations have been stopped, except for squaring existing clients’ open derivatives positions.

Most of Karvy’s clients received their shares back after the National Securities Depository Limited (NSDL) transferred the securities. Meanwhile, the NSE has ordered a forensic audit of Karvy Stock.

WHO OPENED THE DOORS FOR THE LOOT?

Karvy’s case is symbolic of the systematic breakdown in our capital market. Although there is fierce competition among market regulators, stock exchanges and depository participants to take credit for exceptional progression in the capital market, all of them remain silent when they have to answer tough. NSE and BSE, being the first-level regulators, are primarily responsible for controlling the conduct of brokers and supervising their routine affairs. However, they failed, resulting in more hens being massacred.

Notwithstanding numerous IPO scandals and misuse of clients’ trust by the brokers, NSDL and CDSL haven’t learned their lessons. They permitted the KSBL to transfer securities from even inactive accounts and the pledging of third party shares by the company prolonged under their nose. The regulators’ integrated surveillance system of checks and balances stood grossly exposed as a result of this fraudulence coupled with their own inefficiency in detecting the fraud.

LENDERS ON THIN ICE

Despite a robust process being followed by financial institutions in handing out housing loans, KSBL acquired them from major players such as ICICI Bank, Axis Bank, HDFC Bank, IndusInd Bank and Bajaj Finance. Clearly, the lenders have flouted many prescribed norms in handing out loans. RBI only permits lenders to offer need-based overdraft instruments against the securities held by them as a stock-in-trade.

In June 2019, SEBI read out the riot act by barring brokers from raising funds by pledging clients’ securities and asked them to un-pledge these by 31 August 2019. As a result, lenders of KSBL lost control over their pledged securities, with the Securities Appellate Tribunal upholding the decision of the regulator and terming the reversal of share transfer done by NSDL as ‘untenable.’

The Karvy saga reverberates in an old adage of GK Chesterton: “it isn’t that they can’t see the solution. It is that they can’t see the problem.” Karvy is an excellent case study to judge the competence of the financial market. Stringent laws are needed and must be implemented. Rigorous censoring, reporting standards, real-time alarms to clients can surely mitigate the vulnerability of the system. Else, the Karvy Khushi, Karvy Gham story continues!

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