The Karvy Scam: Explained

Karvy scam is the case where a financial services group, Karvy Stock Broking Ltd, allegedly committing fraud with its clients’ money worth around 1,096 crore. The Hyderabad-based company—among the largest broker companies in the country with regards to the number of client accounts— defaulted in payment to its clients after purportedly misusing the funds.

This is one of the biggest scams to rock the Indian stock market in recent times. Earlier, Harshad Mehta scam in the 1990’s, Ketan Parekh scam in early 2000, and the Satyam scam in 2008 had shook the Indian stock market.

How was the scam revealed?

The Karvy Scam hit the headlines recently after scores of investors complained that the firm had not provided the stipulated payouts. Many of the investors had approached the Prime Minister’s Office (PMO), the ministry of finance and Securities Exchange Board of India (SEBI) through social media. Earlier in 2019, many investors had complained to SEBI about several discrepancies in their Demat accounts held by the company. Following this, the National Stock Exchange (NSE) initiated a limited period probe, from January 2019 to August 2019, and provided its preliminary report to the SEBI.

On the basis of the report, the stock market regulator banned Karvy from new client operations in the stock market. The NSE findings have not been disclosed completely in the public domain, though initial reports suggest that the firm has allegedly contravened multiple rules.

According to some reports, the company was facing rough weather after a massive client deal on castor seeds contracts going sour. Because of the huge losses and the consequent liquidity crunch, the company defaulted on payments to its clients. The company was allegedly involved in several multi-crore deals after misusing the securities of its clients.

Modus Operandi of the Karvy Scam:

According to the SEBI, Karvy transferred and pledged clients share in its own name to garner profits. Transferring or pledging clients’ funds is expressly barred by law. The initial report by the NSE reveals that not only did Karvy transferred active third-party shares, but even pledged many dormant ones.

The modus operandi of the stock market scam was through the following steps:

1. Unauthorised transfer of clients securities to the company itself.
2. Unauthorised pledging of clients securities in the market.
3. Raising money through the securities.
4. Thereafter the money raised was transferred to the company.

What does the SEBI order say about the stock market scam?

On November 22, 2019, SEBI issued a temporary ex-parte order (an order passed in the absence of the accused party; often because the party fails to present itself) prohibiting Karvy from participating in the stock market. SEBI also ordered a forensic audit of the alleged unauthorised transactions. It said that preliminary inquiries had revealed that an amount of 1,096 crores was transferred by Karvy Stock Broking Ltd to its parent company, Karvy Realty Private Ltd. All the unauthorised transactions took place from April 2016 onwards, SEBI said.

The SEBI also directed both the national depositories: the National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) to not allow Karvy to act on behalf of its clients with immediate effect. Any power of attorney provided to the company by its clients would be void, it said. The SEBI also asked the CDSL to keep a tab on the Depository Participants (DP) account of its clients.

SEBI said that there was a “serious doubt” on the way Karvy had conducted its business and operations in the stock market.

Repercussions for the Indian economy:

Though the repercussions of the stock market scam are not being felt immediately, the extent of damage to the stock market could adversely affect the Indian economy—already reeling under a slowdown and inflationary pressures—in the coming days. This is a worrisome situation for Indian businesses, especially for the Small and Medium Enterprises.

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What is Karvy’s response on the charges levied by the SEBI?

Vehemently denying the charges, Karvy said that there was no fraud; whatsoever. A statement from the company said that that the ban by SEBI was only for 21 days; that too for taking new customers on-board. While acknowledging the delay in payouts, it said that the clients’ grievances would be redressed soon.

Conclusion: Thus, the Karvy Scam is a suspected stock market scam of Rs 1,096 crore committed by the Karvy Stock Broking Company by misusing the securities of its clients. The extent of fraud is expected to increase substantially after NSE decides to expand the period of its inspection. Meanwhile, the company will file its response or rebuttal on the SEBI order by December 16.

Though a final picture on the extent of damage to the country’s economy is yet to emerge, market experts suggest that it could be a severe blow to the already weakened economy. This might not augur well for Indian business and industries. Fortunately, you can hedge against any possible risks by increasing the profitability of your business. Business loans, available on Bajaj Markets, might just be the opportunity to provide your business with the much needed boost. Hurry!! Download the Bajaj Markets Business Loan App to apply for a business loan. With the easy availability of small business loans up to Rs 30 lakh, funding your business is just a few clicks away.

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