SEBI, the Securities and Exchange Board of India, has issued a final order in the Karvy demat scam and taken action against the Managing Director and directors of Karvy Stock Broking Limited (KSBL). The scam involved the brokerage firm using clients’ shares as collateral to get loans from banks and NBFCs, and diverting funds to its real estate subsidiary. KSBL was found to have violated market regulations, with securities worth Rs 2,300 crore pledged to get loans and as many as 95,000 clients affected. Karvy has been barred from trading on exchanges and accepting new clients. SEBI has also penalised KSBL, its MD Comandur Parthasarathy and independent directors, Bhagwan Das Narang and Jyothi Prasad, and Rajiv Ranjan Singh, CEO, and directed Karvy Realty (India) Limited and Karvy Capital Limited to return an amount of Rs 1,442.95 crore within three months.
SEBI has ordered NSE to take control of the assets of Karvy Realty and Karvy Capital, the subsidiaries of KSBL, that were beneficiaries of illegal transfers from their parent company, if they fail to return the amount. The market regulator has directed that the transferred funds, amounting to Rs 1,442.95 crore, be returned within three months. KSBL and its MD have been barred from accessing securities and dealing in securities for seven years, and have been penalised Rs 13 crore and Rs 8 crore respectively for violations of SEBI circulars and regulations. Lastly, the independent directors of the company have been restrained from holding the post of director or any key managerial position or associating themselves in any capacity with any listed public company and any public company for two years.
The Karvy demat scam involved the brokerage house pledging securities lying in the demat account of unsuspecting customers without their knowledge to raise funds from banks and other NBFCs. The value of securities pledged had increased to Rs 2,700 crore by September 2019. The regulator found that at least 75% of the total shares in all its clients’ holdings were pledged by KSBL to borrow funds for its use, which included cases where the clients’ holdings were pledged despite them having credit balances in their accounts maintained with KSBL. The scam highlighted regulatory failure and exposed the shortfalls in SEBI’s scope of supervision.