Karvy Scam and and Regulator response

by | Feb 4, 2020 | Learning Module 3, Topic 6: Short Selling | 0 comments

In November 2019, SEBI issued an order to Karvy Stock Broking Ltd (KSB) preventing it from executing and settling trades on behalf of its clients. This was because KSB had apparently violated broking rules by transferring client shares to itself and then using those shares to raise money. This appears to affected nearly 1 lakh clients, shares from their accounts were pledged and about Rs.600 crores raised. KSB was thus prevented from acquiring new clients and the depositories were told not to honor KSB’s instruction for client share transfer during settlement. As of January 2020, the majority of those clients seem to have got their securities back.

So, what is the message here. It is the same one, of due diligence. You cannot take things on trust with your broker.

a) You have to make sure that when you sold shares, the funds were actually paid back into your account in one day(payout) and check your account to make sure that they were. Do not leave funds idle with the broker, thinking that you may use those funds for subsequent purchases. They are required to return the funds to you within 90 days, why tempt them to do something with it in the meantime?
b) You have to make sure you get contract notes from your broker in one day, and also make sure that purchased securities did get deposited into your demat account.
c) Verify balances in your bank account, verify the contract note sent by the broker on the same day, verify messages sent by the exchanges regarding balances with your trading member, verify messages from the depositories to make sure they are all correct.
d) Move to another demat with another broker if all this does not appear satisfactory. That creates a lot more paperwork for you!

Picking securities to buy or sell is tricky enough without having to worry about this sort of back-end games that brokers can play. If one cannot trust the back-end to work properly, it is becomes one more reason why people hesitate to participate in markets.