KARVY STOCK BROKING SCAM

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 Realty Ltd. The total default is estimated to be to the tune of ?2000 crore. Out of this, an amount close to ?1100 crore is believed to have been transferred by Karvy Stock Broking to its real estate arm Karvy Realty Private Limited. As per a Mint report dated 3rd December, NSDL had transferred securities worth Rs.2,013.77 crores to the accounts of 83,306 clients.

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

1. A Demat account holder can log in to her online account or ask for an account statement to verify whether all the account holdings are in place and 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 will take 1-2 working days. In the case that the investor has liquid cash lying in the trading account, she can place a request for money transfer and then consider closing the account. There is an option to complain through the Investor Grievance Redressal Mechanism in case the money is not transferred by lodging the complaint on SCORES (SEBI Complaint Redress System) – http://scores.gov.in

 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 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 crores 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.

RBI TAKES CONTROL OF DHFL

In a move which shows that the Central Bank is keen to fast track the resolution process where stressed NBFC’s are involved, RBI superseded DHFL’s board on 20th November and followed it up by setting up a three-member advisory committee two days later to assist the administrator it has appointed for Dewan Housing Finance Corp. Ltd (DHFL) to ensure that the debt-laden company’s asset quality does not worsen any further. The RBI is now set to move the NCLT for appointing the administrator as the insolvency resolution professional. Subsequently, the resolution professional will chair the meetings of the advisory committee once the insolvency process starts. The central bank’s initiative seeks to secure the interests of creditors, including over 100,000 fixed deposit holders of DHFL, as a delay in resolution can lead to a rise in slippages and higher non-performing assets for the HFC, which stopped lending a few months ago. As of July 2019, DHFL owed Rs.83,873 crores to lenders including banks, the National Housing Board, mutual funds and retail bondholders and depositors.

KNOWLEDGE – SIDE POCKETING OF FUNDS

Why is side pocketing recommended?

Sidepocketing helps the investor as the bad quality asset is segregated from the good quality assets. This leads to a reduced redemption demand from investors which otherwise would lead to forced selling of liquid and better quality papers increasing the holding % of the defaulted paper in the fund corpus as the fund manager will not be able to sell the proportionate holding in the latter due to its recent default.

How is it implemented?

Side pocketing is considered as a change in the fundamental attributes of a scheme and therefore requires an asset management company (AMC) before creating a side pocket to amend the scheme information document (SID) and allow an exit window of 30 days without any exit load. Once this permission is taken on the day of the event, the AMC can segregate papers that are illiquid or in default category from all other instruments in the portfolio that are liquid. This results in the creation of two schemes with one holding the liquid good assets portfolio and the other holding the illiquid default security.

Does a mail intimation of possible side pocketing by an AMC indicate imminent default in that AMC’s funds?

An intimation by the AMC is always mandatory when there is an amendment to the scheme information document due to a change in the fundamental attributes of a scheme. Since side pocketing is considered as a change in the attribute of a scheme, the AMC has to follow the procedure of intimation by mail and does not indicate a default event in any of its holdings.

FINANCIAL NEWS

Securities and Exchange Board of India (SEBI) on 20th November increased the minimum investment limit by clients in a Portfolio Management Service (PMS) to Rs.50 lakh from the earlier 25 lakh limit. The base net worth requirement of portfolio managers has also been raised to Rs 5 crore from Rs 2 crore.

The regulator said the portfolio managers of non-discretionary

PMS (where client consent is needed for every transaction) cannot invest more than 25% of their assets under management (AUM) in unlisted securities while discretionary PMS products can invest only in listed securities, money market instruments and mutual funds. SEBI has also made it mandatory for PMS providers to have a custodian—a third party, who will hold the securities of clients. Some more decisions are likely to be made related to PMS Products including a Direct option facility to investors which means zero commission to distributors, the eligibility criterion for distributors to distribute PMS Products, capping operational charges at 0.5% of the corpus.

SEBI has reduced the rights issue timeline from 55 days to 31 days indicating that the timeline may be reduced further in future. SEBI has allowed trading in rights entitlement by which a shareholder entitled to get shares under the rights programme can transfer the entitlement to another investor at a price.

SEBI has now said any default of payments of interest or principal on loans taken from financial institutions, including banks, will have to be disclosed if it continues beyond 30 days and has withdrawn the previous circular issued two years back which wanted disclosure of default event even if there was a delay of payment by one day.

The first corporate bond Exchange Traded Fund (Bharat Bond ETF) has been approved by the Government. The scheme will come in two options, one maturing in 3 years and the other in 10 years. The ETF will be listed on the exchanges which will bring easier access to retail participants who can invest as little as Rs.1000. The ETF will invest in a bond portfolio of securities issued by government entities and state-run companies. The initial offering will comprise of all AAA-rated (highest rating) bonds.

DOMESTIC ECONOMY

After two months of negative growth, the GST collections grew by 6% in November over the corresponding period last year to Rs.1.03 trillion, against Rs.95,380 billion in October. These figures are for October, collected in November. Although the increase is positive, still it is lower than the expected collection rate needed to meet the steep target for 2019-20 (FY20) which is around Rs.1.18 trillion.

India’s GDP growth in the July-September quarter (Q2) 2019 fell to 4.5%, the lowest in more than six years. In the same quarter last year, the growth rate was 7.1%. The low rate of expansion was mainly on account of weak manufacturing, falling consumer demand and private investment, and a drop in exports due to a global slowdown and trade wars. The GDP growth rate could have been lower if it was not for an increase in Government spending.

India's fiscal deficit in the first seven months through October stood at Rs.7.2 trillion, or 102.4% of the budgeted target for the current financial year. A reduced tax collection on both the direct and the indirect front would mean that the government may not go ahead with the reduction in personal tax rates or slow down government spending at a time when other avenues of growth are looking less likely. The output of eight core infrastructure industries in the economy contracted by 5.8% in October.

A Singapore consortium and the Andhra Pradesh government cancelled the proposed multi-billion-dollar capital city Amaravati project on supposedly “mutual consent”. The Singapore Consortium companies have stated that the project’s closure does not impact their investment plans in India. This follows the State Government’s previous decision to halt the renewable energy power purchase agreements which was overruled following the intervention of the Andhra Pradesh High Court, although the High Court has to still express its observations on the State Government’s right to unilaterally reduce the tariffs that were decided through power purchase agreements conducted under arms-length criteria.

As per the Mudra Loans website, loans worth Rs.1.52 lakh crore have been sanctioned under the scheme in FY19-20, less than half of Rs.3.12 lakh crore sanctioned in 2018-19. Banks have tightened the verification process and slowed down the sanctions of loans. Reserve Bank of India’s Deputy Governor MK Jain recently warned bankers about the growing stress in Mudra loans and asked the bankers to “monitor such loans closely as unsustainable credit growth in the sector can risk the system.”

COMPANY NEWS

For the first time in more than a decade, India’s three private telecom operators, Vodafone Idea Limited, Bharti Airtel Limited and Reliance Jio Infocomm Ltd have decided to raise prices of their pre-paid call and data services. Hikes in most of the plans, across the three operators, are in the range of 15% to 20% with the maximum being around 47%.

As per a report released by Liases Foras, a Mumbai based real estate data analytics company, the top 35 cities registered a sales of 91,115 units in September quarter, 2% lower than the 93,426 units sold in the July quarter and out of 35 cities, 22 cities witnessed a drop in sales. The weighted average price across 35 cities saw a 1% drop compared to the previous quarter. Prices dropped in 14 cities while increased in only nine cities. Hyderabad is the only city among the tier 1 cities to show a significant increase in the price of 5%. However, the listed developers registered an increase of 9% in sales during the July-September quarter as compared to the previous quarter, as per Anarock Property Consultants. As per Anarock, listed players are benefitting from the consolidation happening in the industry and industry estimates suggest that a lot of developers have either been wiped off or have merged with organised players post demonetisation and RERA.

Department of Telecommunication will give an option to the Telecom Service Providers (TSPs) to defer payment of the spectrum auction instalments due for 2020-21 & 2021-22, either for one or both years. The two-year moratorium on spectrum-related dues translates into an Rs.42,000 crore financial support to Bharti Airtel, Vodafone Idea and Reliance Jio.

The government aims to sell it’s 53% stake in Bharat Petroleum Corp. Ltd (BPCL) to meet the divestment target of Rs.1.05 trillion for FY20. In anticipation of the stake sale, BPCL shares have risen 40% this year. At the current valuation, the sale can fetch the government around Rs.59,000 crore.

INTERNATIONAL MARKET

The U.S. Senate unanimously passed a bill on 19th November aimed at supporting protesters in Hong Kong and cautioned China against resorting to violent suppression of the demonstrations. The Chinese Government has threatened to retaliate with countermeasures if the legislation becomes law. The timing of the legislation interferes with the effort by President Trump’s administration trying to complete the first phase of a long-awaited trade deal with Chinese leader Xi Jinping.

Core personal consumption expenditures (PCE) index – which is the US Fed’s preferred measure of inflation – slowed to a pace of 1.6% in October, comfortably below Fed’s target of 2%. A report from the Institute for Supply Management (ISM) showed U.S. manufacturing activity contracted in November for the fourth consecutive month, adding to the concerns that the longest period of economic expansion in U.S. history may be close to reversing.

Moody’s, the rating firm has cut its outlook on British Banks to negative from stable, citing factors including the “prolonged uncertainty over Brexit” and its impact on economic growth over the next two years.

The Trump administration threatened tariffs of up to 100% on $2.4 billion worth of French imports to retaliate against a tax on digital services. Trump also announced tariffs on Brazil and Argentina on their steel imports due to alleged currency manipulation.