Last month, the Securities and Exchange Board of India (SEBI) had banned the brokerage firm from taking new clients and executing trades for its brazen modus operandi of misusing client funds by using their demat accounts.
The prompt action of the market regulator and its effective implementation by the bourses ensured that nearly 83,000 investors got back their securities which were illegally transferred by the firm to its own account and were even pledged for raising loan without the authorisation.
However, the matter once again highlighted that Indian markets are prone to manipulations and stricter and pragmatic regulations are still required for the market players to ensure fair play.
Karvy started its journey as a stock broker way back in 1983 and ever since has managed several large and prominent market offerings besides being a portfolio manager for key clients.
Its long journey at the bourses gave it the reputation of being a smart broker which could help investors grow their wealth. But in the process, the company also got aware of the loopholes in the system and how to use them for its own gains. It is here that the process of illegal transfer of clients' funds by the broker to its own account started.
Like a normal brokerage operation, Karvy took money from clients for any buy order and transferred shares to them upon making payment to the bourses. Similarly, for share sale, the scrip moved from client's demat account to the pool account of the broker from where it was transferred to the exchanges and the money received in return was deposited back into the client's account.
It all seemed fair, till the broker started using client shares received into its pool account for pledging and raising loans. The client shares were then pledged for raising loans without authorisation for personal gains.
Karvy's modus operandi involved transferring of shares from demat accounts of its clients, which were inactive, to demat accounts controlled by the broking house. It then pledged those shares with lenders and raised funds. These funds were transferred to Karvy Realty.
C. Parthasarathy, Chairman and Managing Director of Karvy group and a chartered accountant by qualification, had co-founded Karvy in 1983. Last week he resigned from Karvy Fintech, which acts as a registrar and transfer agent (RTA) for the mutual fund industry. His resignation had come after SEBI barred Karvy from taking fresh clients.
( With inputs from IANS )