Karvy Stock Broking, the equity broker who has defaulted on client payments, has told SEBI and NSE that it will be selling its assets and subsidiary to pay back money to clients that its owes. The broking firm has sought time till mid-March, SEBI Chairman Ajay Tyagi announced in a press conference.

So far Karvy has not been declared as a ‘defaulter’ by the NSE. It is only after a broker is declared as a defaulter that its clients can claim money from the investor protection fund of a stock exchange. But Tyagi said the priority is to recover money from the broker and the exchange and SEBI was working on it.

“Be rest assured that action will be taken against anybody who has indulged in professional misconduct. But top priority is to recover investor money. The shortfall currently is ₹678 crore. The total due was ₹1,189 crore out of which securities were ₹694 crore and funds ₹495 crore. Around ₹511 crore is available. Kravy has informed that it is selling assets and stake in subsidiary company. Once money is recovered further course of action will follow,” Tyagi said.

Three brokers including Vrise Securities, Kaynet Finance and BMA Wealth Creators were declared as ‘defaulters’ by NSE last week but Karvy was left out. The NSE declined to comment on the issue but a source close to the exchange said that the forensic investigation report with regard to Karvy was submitted to an internal committee and a call will be taken on it soon. The source further said that there was probability of recovery of funds from Karvy. The procedure for declaring brokers as defaulters is standard for every broker but small brokers take less time and a large player could take more, the source said.

NSE’s inspection report put out by SEBI in November had revealed that the broker had transferred a net amount ₹1,096 crore to its group company Karvy Realty between April 2016 and October 2019. Broker had sold pledged client shares via off-market transfer as its own in five out of nine client accounts amounting to ₹228.07 crore in 2019 and transferred stocks worth ₹27.8 crore from 156 clients who have not executed a single trade with them. Further, the broker transferred excess securities to six out of these nine related clients to the tune of ₹162 crore till May 2019. Stocks worth ₹257.08 crore, pledged on behalf of four clients were un-pledged between June and August 2019 and securities worth of ₹217.85 crores were recovered by Karvy from four out of the said nine client accounts. Karvy has also purchased securities in five out of the respective nine client accounts amounting to ₹228.07 crore in 2019.

SAT move, withdrawal

Following the NSE report, SEBI had banned Karvy from accepting new clients in November 2019. Later, SEBI also directed depository participants to transfer shares pledged by Karvy to be retuned to more than 80,000 clients even when their was a lien on them in favour of few banks who had lent money to Karvy worth several hundred crores. In December 2019, Karvy had moved the Securities Appellate Tribunal against SEBI and NSE but withdrew the plea in February this year.

In the case of the three brokers suspended last week, the exchanges found them to have pledged client shares without consent and hence their licence was suspended. So far, more than 15 brokers, who have lakhs of clients, were declared defaulters by exchanges since 2017.

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