Karvy Scam: What Lies Ahead For Investors?

Just over a month ago, in November, one of the oldest and reputed financial services company and stock broking firm that catered to lakhs of customers across the country was forced to cease operations almost immediately. The reason – it misused the Power of Attorney (PoA) given to it by the investors and transferred the shares from the investors’ account to another account and then pledged Rs2,300 crore worth of shares of over 95,000 clients as collateral to get loans from banks and NBFCs by pretending that the shares belonged to the company.

Following the unravelling of the fraud, both Bombay Stock Exchange (BSE) and National Stock Exchange of India (NSE) suspended the trading license of Karvy while Sebi issued an order preventing the firm from adding new customers and barring it from exercising the PoA given by its customers.

Investors are yet to recover from the shock and are concerned about their investments. And not just those who invested with Karvy but others are also asking questions if their broker could also do something like this. What should they do to safeguard their investments, they ask.

Some experts believe that the immediate aftermath of the crisis is that the investor community is in shock and a shadow of doubt is cast on the stock broking community  in which everyone is being perceived with suspicion.

Rahul Agarwal, Director, Wealth Discovery/EZ Wealth, while speaking to Outlook Money says that the Karvy crisis should remind investors about the flaws in stock broking industry and hence take preventive measures. “Karvy is not the only one which may be involved in such kind of malpractices. Therefore, investors are well advised to take a series of steps to protect their investments,” he further adds.

Prashant Joshi, Co-founder and Partner, Fintrust Advisors LLP, feels that the event has definitely shaken the confidence and raised suspicion in the mind of investors towards their brokers, irrespective of the length of association with them. He feels many investors are seeking clarity on the safety of even mutual fund investments.

“During these times, communication and education becomes key and it is imperative that all investment advisors educate their clients, and take them through the operational framework of investment vehicles in detail, so that unwarranted fear and pessimism is curtailed,” he says.

Since Sebi has suspended operations of Karvy Stock Broking, its existing investors will not be able to do any transaction in that demat account. They should open a new trading and demat account with another broker of their choice and then move the stocks from Karvy’s demat account to their new account, explains Ankur Choudhary, Co-founder and Chief Information Officer, Goalwise.

“Their new broker will be able to help with the process of the transfer. Also, if there is any idle cash lying in their demat account, they should immediately transfer it to their bank account. Further, in case there is any discrepancy found in the demat holdings, investors should immediately lodge a complaint against Karvy using the Sebi’s scores platform,” he explains with a note of caution.

Tejas Khoday, CEO and Co-founder,  FYERS, a trade and investment platform, feels that most of the affected clients have got their shares and securities credited to their respective demat accounts. And those who have not, need to wait till further orders from the Securities Appellate Tribunal (SAT), since it has put a stay on any transfer of securities from the broker’s accounts due to appeals filed by the broker’s lenders.  

After the scam came to light, the NSE issued a series of guidelines for investors urging them to take some precautions. It asked them to ensure that pay-out of funds and securities is received in their account within one working day from the date of pay-out.

Agarwal advises investors to exercise extreme caution while executing PoAs as it is one of the important documents that one needs to check before signing as it specifies all the rights that the stock broker can exercise on an investor’s behalf. It may be noted that PoA is not a mandatory requirement as per the Sebi and the stock exchanges.

The NSE has also asked investors to regularly login into their accounts to verify balances and verify the demat statement received from depositories for correctness.

Investors should also always keep their contact details updated with the stock broker and if they do not receive messages from the exchange regularly, they must take up the matter with their stock broker and exchange.

If the investor observes any discrepancy in account or settlements, she should immediately take up the issue with the stock broker. And if the stock broker does not respond, the investor should immediately inform the stock exchange.

According to Agarwal, apart from taking all these measures, investors should try to diversify their holdings and cash balances in different trading accounts with other reputed brokers, to minimise possible default risk.

“Investors should remember that in-spite of all these checks and balances from the regulators and the exchanges, unscrupulous practices do happen. Investors should therefore be mindful of their rights and duties in order to keep their investments safe,” Agarwal cautions.

However, there is a consensus among industry experts that mutual funds are much safer products and there are no such issues. However, according to Mustafa Nadeem, CEO, Epic Research, no financial market is immune to such incidents. However, mutual funds, he feels, are less risky and have a disciplined approach to investing. He advises investors not to liquidate their SIPs and other mutual fund investments because of this incident.

“However, we believe you keep a good check on all transactions in your account. If you are a customer of Karvy, we advise you move on to a better brokerage firm with a good track record,” he says.

Harsh Jain, Co-founder and Chief Operating Officer, Groww, adds that since mutual funds are structured in a similar manner trust is, investments are handled by the Sebi registered custodians.

“Needless to say, this has no bearing on your mutual fund investments. Investors should remain invested in their mutual funds as per their financial plan and should not panic and redeem in haste to as it may hamper your wealth creation prospects,” he says.

Sebi’s order barring Karvy from taking up new clients and refraining from using PoA is an interim order and the regulators are yet to hear what Karvy has to say in the matter. It is only post-Karvy’s response, a thorough analysis, and investigation on both sides will take place before a final decision is taken, says Harsh Jain.

“Investors should remain patient and wait for further developments in this regard,” he advises.

According to Choudhary, the big question is what kind of action will Sebi take against Karvy Stock Broking, its promoters and management when the dust settles.

“It is an outright case of fraud by Karvy Stock Broking arm and they should be penalised accordingly… If it is just going to be a fine and suspension of license, that will not be enough to prevent such cases in future,” he concludes. 

vishav@outlookindia.com