The Securities and Exchange Board of India (Sebi) has banned Karvy Stock Broking over client defaults worth Rs 2,000 crore. It has been barred from taking new clients and executing trades for existing customers.
In an exclusive interview with CNBC-TV18, Karvy Group Chairman C Parthasarathy said all the branches and customers of the firm are able to trade freely and there is absolutely no issue as far as the clients are concerned. “It has been business as usual since morning and we hope it continues to be the same,” he said.
Karvy Stock Broking manages accounts of 244,000 clients, according to the National Stock Exchange of India (NSE) data. The matter first came to light when several investors complained to Sebi that Karvy was delaying their payouts. An annual inspection conducted by the NSE also pointed to discrepancies in trading between 1 April 2016 and October 2019.
“Delays (in pay-outs) have been small, there have been delays because the focus has been on analysing all these securities, the delays have been very small, it would be about Rs 20-30 crore as of now and we hope to clear this by the end of this week,” Parthasarathy said, adding that the firm has 21 days to reply to Sebi.
Edited excerpts from the interview:
We have the response that you have sent to the media houses, the comprehensive rejoinder on media reports concerning Securities and Exchange Board of India, but what is the situation right now, I am sure you are in the process of replying to Sebi, you will have 21 days to do that?
Yes. We have 21 days to reply to Sebi but the situation right now is that all terminals are working, all our customers and all our branches and all online customers are able to trade freely and there is absolutely no issue as far as the clients are concerned. It has been business as usual since morning and we hope it continues to be the same.
There are two issues though – you cannot get the new clients for the time being and the second is, National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) have been instructed not to honour your slips. Is that correct?
The order stipulates that we cannot get new clients, we cannot open new accounts and we cannot generate unique client codes. As soon as the new client is acquired, a unique client code has to be generated. That is the restriction that has been imposed as far as the order is concerned.
The second thing is with regards to the delivery instruction slips – barring those deliveries that will facilitate the delivery of securities on behalf of various customers, we are not allowed to automatically use the power of attorney to transfer any securities on an off-market basis. There is a little bit of clarity to be obtained, but by and large, this is what the order stipulates. Right now, I don’t think we have any issues.
This particular order – hasn’t it been a long time in the making, there were also some extensions that were given. Do you still think more clarity would be required? This time that multiple extensions were given, why wasn’t clarity sought in that interim?
Which multiple extensions? No, multiple extensions were never given. This order is an ex-parte interim order. The ex-parte order itself means that we have never been given an opportunity to represent.
My colleague was talking about that June circular from Sebi. Let us get to the heart of the matter here – in your response, the comprehensive rejoinder that you have sent across, point number 8, the one before last point, says, “We acknowledge that as per prior to Sebi directive, we used to pledge shares from time to time in full compliance with the then directives as was the standard practice across broking houses.” So you are acknowledging that you used to pledge client securities, shares of clients as you say was the practice in the entire industry but following the issuance or the fresh directives of June 2019, you have started the process of reducing the quantum, can you tell us what is the size of that client funding book at this point in time and what was it back in June when the circular came and where are you now?
We have substantially reduced the pledge of shares and we are in the process of reducing the pledge of shares even further. We are in discussion with various bankers and we believe that we can reduce it substantially over the period of time.
Why were you not able to do it by the deadline, which was September 30?
The fact is that we have so many retail investors with us and it was becoming extremely difficult for us to immediately sell the stocks of these retail investors whenever they were partly paid because they used to repeat it again the very next day. Therefore, it took us a lot of time but gradually we are doing this process, it will take another maybe a couple of months.
You said you have substantially reduced, could you tell us what is the size of this book now?
The size of the book will be about Rs 400-500 crore.
And in June, what was this?
In September it was about Rs 1,100 crore and we have reduced it by Rs 550 crore.
So in June, it would be even higher, you reduced it to Rs 1,100 crore and now it stands at about Rs 500 crore?
In June it wouldn’t be higher. It would be approximately the same.
In how much time would you wind this down, by the end of the year?
Maybe in the next two months, we will wind it down completely.
The securities of all clients exist and there is no problem at all and the client deliveries are given from time to time. We have never defaulted on the exchange at all and have we defaulted on the exchange, obviously, we wouldn’t have been allowed to trade on the exchanges.
There have been delays right in pay-out to clients?
Delays have been small, yes, there have been delays because the focus has been on analysing all these securities, the delays have been very small, it would be about Rs 20-30 crore as of now and we hope to clear this by the end of this week.
Rs 20-30 crore that you owe to clients which is running behind schedule?
Which is running behind the schedule and which will be cleared by the end of this week. Presently, whatever is being sold by the clients, automatically it gets delivered on the third day.
You agreed that you were pledging clients’ shares and you said that it was standard practice before the Sebi circular explicitly barred brokers from doing it – that point is taken, but if you look at the Sebi interim order itself, the first very point says that Karvy Stock Broking did not report a particular DP account number into which the securities of clients were allegedly transferred into and you did not report this DP account. Now that’s something which is completely against Sebi rules. You are supposed to disclose everything, isn’t it?
First of all, where is the question of not reporting? We have to report all accounts. These DP accounts are available with depositories and with the exchanges. So where is the question of hiding these accounts?
But that is what the Sebi order says. The first very point?
Based on whatever the NSE has stated in their preliminary report, one of our submissions to the NSE, maybe we have missed out and that is what I am checking out personally, but I just want to add here and make it very clear that there is no way that anybody can cease disclosure because we were all available with the various regulatory agencies. It will be foolish on the part of a broker or anybody else to not to disclose it and if at all it is not disclosed it has been accidental and we have corrected it. If we would have done that then these details wouldn’t have come out, right?
The reason that could be serious and you are acknowledging that it could have been a slip. You could have missed it, you are checking it in terms of disclosure to NSE it could have been missed out, but the reason why I brought that up is because if an account is not disclosed and funds which are raised or shares are transferred into this account which is not disclosed and then out of this account shares are pledged to a bank, institution to raise money. I mean nobody knows what this money is then used for, etc. In a way it is out of the regulatory purview – that is why it gets a little serious.
Whatever securities are transferred to various banks, details of the name of the holder are given there and there is a linkage. So there is no question of taking away securities and transferring it into different accounts. So, whatever has been placed, has been placed on behalf of various clients. The bankers and the exchanges have details of the request that has been made and that includes details of the customers.
What have you used these funds for that you raised? One of the orders talks about diversion of funds into Karvy Real Estate – that’s something which is again pretty serious. So you have raised money via pledging the shares but what have you used it for?
Karvy Realty Limited is a subsidiary company of Karvy Stock Broking Limited and Karvy Realty has been in existence for the last 10 or 15 years. Some of the investments that we have made in other subsidiary companies have been done through Karvy Realty with the objective of protecting the net worth of Karvy Stock Broking. This has been done for a very long time. Investments to these companies and loans to these companies have been given over a 12-year period. I do not know how that number of Rs 1,096 crore has arrived at and we are working towards finding out those details, but this has been a vehicle, which has been used for investing in other subsidiary companies and we have got a full list of this. This is something that has been in existence for more than a decade.
This is money raised via pledging of shares or this is through the group’s own net worth – that’s the question. What is the source of this money?
A decade ago there was no question of pledging of shares at all. This is what we want to do when we make our submissions.
Which is that the money via pledging was not transferred to Karvy Realty?
What was this money used for, if you had a particular client and you were pledging and you were raising money against those shares, was it being used to…..?
We were using it on an ongoing basis so working capital requirement is there.
Whose working capital – the group’s?
Sundry debtors and that is what we are doing. Now we are slowly trying to liquidate sundry debtors and we are trying to see if they can substitute the borrowing by providing some other alternative. We are succeeding in that and we are reducing the total shares that are pledged so that we are compliant with the Sebi’s directive irrespective of whether they are partly paid or fully paid.
It’s a bad time. I think we will be able to clear and explain all these things and where we stand to the regulators and exchange and structurally also we have to make some changes because Karvy Stock Broking apart from being a broker is also the holding company. So structurally, we will remove the broking business and put it into a separate entity so that it is ring-fenced and it does not become a holding company.
You are saying you will separate broking and DP businesses. Is that what you are saying?
Yes, we will separate them into legal entities subject to regulatory approvals once there is clarity on all these matters. So the holding company and the business entity are different legal entities then we will not have problems of this kind in future.
We do not have a proprietary trading book at Karvy. There is no trading that is done in Karvy Stock Broking Limited.
Do you have a proprietary trading book at Karvy?