Karvy Fraud: Why SEBI Banned Karvy?

In a shocking series of events, it’s being reported that Karvy has indulged in a fraud worth Rs. 2000 Crores! How did the stock broker manage to do it?

Read and find out below

David Ogilvy once said “The Customer is Not a Moron, She’s Your Wife”. This quote fits perfectly to those Indian companies which take customers’ trust for granted and don’t hesitate to involve even in wrongdoings for material gains. Being a SEBI registered Investment Advisory ourself, we understand what it is like to gain people’s trust and to maintain it.

But, the reason we are preaching such things is ban imposed by SEBI bans Karvy Stock Broking Ltd. for an alleged client fraud amounting to Rs. 2000 Crores. So, the stock broker can not take any further clients till the investigation is completed.

Role of Pool Account 

There’s a pool account created by stock brokers (you may call it a broker’s Demat account) which facilitates transactions authenticated by clients. Client approval for each transaction will be an additional hassle for the broker as well as for the client because there’s a manual process involved. To avoid the hassle, broker’s pool account is used for the transaction based on PoA given by the client. A PoA means that the broker can execute transactions on its client’s behalf (post consent from the client).

As reported in this case, Karvy transferred the shares from its clients’ demat accounts to its pool account and then pledged the shares with the banks to take money. This money was later transferred to Karvy Realty (its arm, as evident from the company’s name). Later, when the clients asked for their shares, Karvy failed to return them.Therefore SEBI bans karvy

What exactly is the Karvy Fraud about?

According to SEBI’s guidelines - a brokerage firm can not use its clients’ securities to create additional pledges. But, Karvy fraud has allegedly used its client collateral for its own trades. And, therefore it came under SEBI’s radar and all this fuss started. Let’s understand this in detail.

Karvy did not have the legal right to create a pledge on the clients’ securities it had and generate funds, but the stock broker did it (that too amounting to whopping 2000 crores!). SEBI has therefore barred the stock broker from taking any new clients until the completion of investigation. The regulator has also instructed the depositories (CDSL and NSDL) not to act on Karvy’s instructions based on PoA (Power of Attorney) given by its clients.

Our Major Concern: Karvy Fraud

Karvy now has 21 days to file its objections (if any) and responses to SEBI. But, that’s not what we are concerned about. It’s really sad to see companies messing with people’s hard earned money. People trust these companies only to learn that they’ve been betrayed and foxed! Financial services industry is slowly earning a bad name because of few companies but, thanks to SEBI and other regulators who are keeping a close watch and trying their best to avoid instances of fraudulence.This is all about Karvy Fraud.

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