There is a forensic audit currently underway in Karvy Stock broking case. The details are being heard in various regulatory bodies. However, it is of utmost importance to know what happened at Karvy Stock Broking.
It is alleged that Karvy illegally transferred stocks/securities from client demat accounts (i.e. ur demat account) to its own demat account. With help of this Karvy took loans keeping these shares as security and used the loan money for its own businesses.
What is Karvy Stock Broking?
Karvy Stock Broking is a stock broker with 12 lakhs clients. Each of these clients have demat and broking accounts with Karvy. Clients can buy/sell stocks through Karvy.
When u buy, u shud get stocks in ur demat ac and when u sell vice-versa. When u open a stock broking account, you "usually" give a Power of Attorney to the broker, that the broker can debit ur demat account to effect the transfer of stock from your demat account.
What did the Karvy Do?
Karvy created a demat account (as a client account) in its own name i.e. Karvy Stock Broking. They did not report this account to anyone i.e. NSE etc. Then using the Power of Attorney as given to them by the clients they transferred stocks/securities from client accounts to their own account. Added to it when clients bought shares, rather than crediting clients demat account they put them in their own accounts.
Then they went to banks like HDFC, ICICI, IndusInd and Bajaj Finance where the firm showed the shares that they had in their demat account. With the help of these shares they applied for loans and pledged these shares the banks.
Banks and NBFCs pledged these shares and gave them loan. Till now, as per NSE/SEBI, almost Rs. 2300 crore worth of shares were pledged, and loans taken by Karvy Stock Broking on shares which never belonged to them. They used this money for other businesses like Realty, etc.
How NSE caught Karvy?
NSE during its audit found this money heist and informed SEBI. SEBI on November 22, 2019 asked Karvy to stop this and transfer all shares back to the rightful owner.
What was the result?
Around 1 lakh people/clients are estimated to be impacted. Of this around 85,000 have got back their shares in their demat accounts by the swift action of SEBI and depositaries i.e. NSDL, CDSL. Investigation is still going on in this case.
HDFC Bank, ICICI Bank, IndusInd Bank and Bajaj Finance have given loans based on these securities as collateral. Around 340 crores by each of them. If Karvy does not pay back, they will lose money.
How can Clients safeguard their shares?
Technically any broker can use the Power of Attorney as provided by the clients. However, most refrain from doing so unless they want to scam you. Added to it Power of Attorney should be a limited - only to execute taxation, not that broker can debit your demat at their will. Always access ur demat directly with CDSL,, NSDL to check holdings.
Manoj Nagpal @NagpalManoj