Karvy Stock Broking Scam: What Should A Karvy Demat Account Holder Do?

The capital markets regulator, SEBI, on November 22nd banned Karvy from taking new clients. It alleged that Karvy has misused client securities by pledging them with banks and financial institutions to raise funds, some of which were transferred to related party businesses like Karvy Reality Ltd. The total default is estimated to be to the tune of Rs.2000 crore. Out of this, an amount close to Rs.1100 crore is believed to have been transferred by Karvy Stock Broking to its real estate arm Karvy Realty Private Limited. As per reports in the media, NSDL has transferred securities worth Rs.2,013.77 crore to the accounts of 83,306 clients.

What should you do if you are a Karvy demat account holder?

1. Verify Whether All The Account Holdings Are In Place.

A demat account holders can log in to their online account or ask for the account statement to verify whether all the account holdings are in place. They can consider moving the demat holdings after opening another demat account which these days is easy through an off-market transfer of all securities. The off market transactions will not be considered as a sale transaction and therefore there will be no need to pay taxes. If an investor has another demat account already open, then the entire process of transfer will take 1-2 working days. In the case that an investor has liquid cash lying in the trading account, she can place a request for money transfer and then consider closing the account. If there are any issues, there is an option to complain by lodging a complaint on SCORES (SEBI Complaint Redress System) 

2. Opening A New Demat Account.

One can go through the same SCORES website and SEBI’s Intermediaries page to verify if there are pending enquiries, unresolved complaints against the new broker. One can avoid brokers who run proprietary trading, structured products, non-broking related business.

Who gets the pledged shares?

Banks including HDFC Bank Ltd and ICICI Bank Ltd are seeking to recover Rs.1,000 crore they had lent to Karvy and have contested to the Securities Appellate Tribunal (SAT) about their right to access client shares that Karvy Stock Broking Ltd had pledged with them. Along with IndusInd Bank, they have also raised the issue to SAT of NSDL transferring the shares back to the beneficial owners.

Are my mutual funds under risk?

Karvy Fintech which is part of Karvy has got investors worried as it provides registrar and transfer agency (RTA) services to many fund houses such as Axis MF, LIC MF, Principal MF, Nippon MF (Reliance), Sundaram MF etc. Karvy also provides distributor services to all asset management companies (AMC). Neither the invested money nor the allotted units can be reallocated or switched to any

intermediary. The scam related party Karvy Stock Broking is not linked with Karvy Fintech. Karvy Fintech which provides the RTA service to Mutual Fund investors, is no longer part of the Karvy Group and the US-based company General Atlantic has acquired 83.25% in Karvy Fintech.

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The writer is the CIO of Mitraz Financial and can be contacted through micontact@mitraz.financial

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