Taken for a Ride…

Stock market and banking sector scams are not new to our country. Time and again a new fraud gets unearthed taking with-it hard-earned money of unsuspecting investors. The recent fraud being investigated is related to the renowned Stock broking firm Karvy stock broking. Let’s understand what this fraud is all about and what you need to do if you are affected by it.

A November 22 ex-parte interim order by the Securities and Exchange Board of India banned Karvy Stock Broking Limited (KSBL) from taking on new clients. It also barred the broker from using its power of attorney to withdraw shares from clients' demat accounts.

How it happened?

To explain how Karvy stock broking committed the fraud let me give you a small example, I deposit my money with a bank. Bank acts as custodian of my money. But bank uses my money to give loan to some other businessman and therefore it gives me interest for my deposit. Fair enough! I am getting the interest! When I demand my money back, the bank is ready to pay it. Because you know, it is ‘My’ money and I am the ‘Owner’ of the money. Karvy stock broking’ thought they were a bank! It used the shares of customers to raise money for its own use. Karvy stock broking is a stock broker who buys and sells shares on behalf of its clients by charging them a set brokerage fee for each transaction. Needless to say, that the client is the legitimate ‘Owner’ of the shares. Now, what Karvy did is something against the law. Karvy pledged the shares of its client and raised money from banks. The money raised was to the tune of 2000 crore rupees. Fun Fact: Banks did not even bother to ask as to how they were pledging the assets they do not even own! Karvy then diverted the money to its real estate arm.

Brokers are not allowed to use client collateral (securities, mutual funds, etc) in any manner or to create pledges on them. It's a very serious matter. Imagine if the broker who does this goes bankrupt or runs away. The client (you and I) who bought shares for the long term thinking they are safe will now have nothing as the lender will sell these pledged shares and the loss will be to the client’s account. An NSE inspection showed Karvy had transferred a net amount Rs 1,096 crore to its group firm Karvy Realty between April 2016 and October 2019.The brokerage also sold pledged client shares via off-market transfer as its own in five out of nine client accounts amounting to Rs 228.07 crore in 2019 and transferred stocks worth Rs 27.8 crore from 156 clients. None of these trades were executed or authorized by the clients.

What should the clients do?

Clients should ascertain whether the holdings in their demat accounts are intact. If all the stocks you have purchased are there, you should find out if there have been any unauthorised transactions. Request Karvy to generate a statement of transaction for your demat account for the past three years. If shares have gone out or come in, that will show up. Withdraw idle funds lying in your trading account immediately. Next, open an account with another broker and obtain a client master report (CMR) from it. Submit a copy of the CMR to Karvy and initiate a closure cum transfer request. No capital gain tax will be levied from the customer on such a transaction.

If demat account has been affected

In case of any grievance, file a complaint with SEBI on its SCORES (SEBI Complaints Redress System) Web site. If the holdings in your demat account have been misused, complain to the depository also. If a stock you purchased has not been credited to your demat account, complain to the National Stock Exchange (NSE).In case it is not able to do so, investors could be compensated out of the Investor Protection Fund maintained by the exchanges (to the extent of Rs 25 lakh per investor per defaulter/expelled member).

Lessons for the future

This is not the only scam relating to stock broking firm this year infact Karvy is the 4th broking firm banned by SEBI in the last six months. So, here’s a small checklist to keep in mind while dealing with your stockbroker, keep your mobile number and email ID with the broker and the depository updated. Whenever there is a transaction, the concerned depository sends out an SMS message. Check it to keep an eye on activities in your demat account. Similarly, look at the contract notes sent by the broker and the consolidated account statement (CAS) sent each month by the depository. Inactive investors who do not to keep an eye on their accounts are the ones who tend to be defrauded. In the end its our money and our wealth, fraudsters will try and find ingenious ways to steal it and its upto us to keep ourselves educated and informed about safeguarding our investments. Remember a clever person solves a problem. A wise person avoids it.