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SEBI delivers final order in Karvy Demat scam, cracks down on MD and Directors

The Securities and Exchange Board of India (SEBI) took stringent action against the managing director and independent directors of Karvy Stock Broking Limited (KSBL), signifying a turning point in the stock market fraud that syphoned off crores of investor wealth and resulting in structural and profound investor reforms.

When the Karvy demat fraud came to the public’s attention, it raised difficult questions of regulatory failure and revealed humiliating gaps in SEBI’s scope of supervision. The recent declaration by SEBI chief Madhabi Puri Buch that another Karvy-like incident will take place over the regulator’s deceased corpse serves as a gauge of the gravity and critical attention given to this issue.

The market regulator ordered Karvy Realty (India) Limited and Karvy Capital Limited, two subsidiaries of KSBL that benefited from illegal transfers from their parent company, to return Rs 1,442,95 crore within three months. If the two recipient companies fail to return the transmitted funds, the NSE has been instructed to seize their assets in order to recover the amount. Between FY17 and FY20, the aforementioned funds were transferred out of KSBL.

KSBL and its MD, Comandur Parthasarathy, have been fined Rs 13 crore and Rs 8 crore, respectively, for violations of multiple SEBI circulars and regulations. In addition, it has prohibited KSBL and Parthasarathy from accessing the securities and trading in securities for seven years.

The company’s independent directors, namely Bhagwan Das Narang and Jyothi Prasad, have also been fined Rs 5 lakh each. For a period of two years, both of them are prohibited from holding the position of director, any critical managerial position, or associating themselves in any capacity with any listed public company or any public company.

CEO Rajiv Ranjan Singh, who was found to have acted negligently and failed to exercise due diligence, has been cautioned and directed to “exercise caution before associating himself with any intermediary of the securities market or publicly listed company.”

By pledging securities in the demat accounts of unwitting customers, the brokerage firm committed the Karvy demat fraud, which came to light in the second half of 2019. The behind-the-customer pledge was performed to solicit funds from banks and other NBFCs. HDFC Bank, Axis Bank, IndusInd Bank, Bajaj Finance, Aditya Birla Finance, and others provided financing.

In September 2016, KSBL’s outstanding borrowing under the loan against securities (LAS) facility offered by banks was Rs 789.41 crore, and its total borrowing was Rs 1,051.36 crore. By September 30, 2019, KSBL’s total borrowings had risen to Rs 2,032.67 billion.

Simultaneously, the amount of security pledged by KSBL increased significantly. The value of the securities pledged rose from Rs 202 crore on June 30, 2017 to Rs 1,855 crore in March 2018, and then to Rs 2,700 crore by September 2019.

The regulator also discovered that as of September 5, 2019, at least 75 percent of the total shares in all of KSBL’s clients’ holdings were pledged by KSBL to borrow funds for its own use, including instances in which the clients’ holdings were pledged despite the clients’ accounts with KSBL having credit balances.

“The massive asset mobilization drive followed by raising of huge sums of funds from financial institutions by using the securities mobilized from the clients with a promise to pay them interest and misappropriating those funds…speak a tell-tale story of fraud driven by the greed of KSBL and its management to amass thousands of crore of rupees at the cost of its innocent clients, making it a fit case where SEBI needs to send out a firm message to deter the stock brokers and their managements from indulging in such acts of unethical, unfair and fraudulent behaviour as observed in this case,” the WTM observed in its order.

Aryan Jakhar
Aryan Jakhar
Aryan Jakhar is an Indian Journalist with over two years of active working experience. Aryan is currently working as editor-in-chief at BusinessHeadline.in and he is reachable on contact@businessheadline.in
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