Karvy suspension: what investors need to know

The worst is not yet over for clients of one of the largest brokerage firms in the country, Karvy Stock Broking Ltd (KSBL).

While clients have been facing hardship for the last one week, with SEBI issuing an ex-parte-ad-interim order, the exchanges now seem to have simply ended the game by suspending KSBL’s membership licence.

The NSE, through a circular dated December 2, 2019, suspended the brokerage firm from the capital market, futures & options, currency derivatives, debt, MFSS and commodity derivatives segments.

Other exchanges have also followed suit. The BSE has deactivated the trading terminals of KSBL in the equity and debt segments, but has put it in the risk reduction mode (RRM) in the equity derivatives, currency derivatives and commodity segments. MCX has also followed suit in suspending Karvy in commodity trading.

What does this mean for clients?

Clients of KSBL can no longer trade using their broking or trading accounts in KSBL, following the suspension orders from the exchanges.

For those with open trading positions, BSE’s RRM mode could be of respite. While the exchanges have prohibited fresh positions (and roll over), squaring off the existing positions is however permitted. NSE, too, is reported to be allowing closing of existing open derivative positions.

That apart, experts believe that the suspension does not mean doomsday for all clients of KSBL. Clients who have already taken delivery of their traded securities, can transfer their shares to a demat account with another brokerage. The same is the case with those who have opened a demat account with Karvy solely for the purpose of investing in mutual funds.

This is, however, a matter of debate, given the series of hardships that Karvy Broking’s clients have had to face in the last one week.

A week of hardship

After a preliminary investigation by NSE, SEBI had, vide a circular dated November 22, 2019, banned Karvy from enrolling new clients and prohibited transfer of securities or funds to or from KSBL’s own trading account, unless the shares were fully paid for.

While SEBI had permitted other transactions, except those warranting the use of the Power of Attorney (POA) by KSBL, the company had other restrictions in place.

Speaking to various employees at the branch level in Karvy Stock Broking, we realised that KSBL simply refused to allow any transactions — be it online trading, transfer of securities or even withdrawal of funds from the demat account — citing a forensic audit last week. Though the said personnel clarified that these restrictions would be lifted from this week, the on-ground reality is not known.

Investors can, upon being denied access to withdrawals, etc, file a complaint with the exchanges. Appropriate action will however be taken by the exchanges only after a said number of complaints are filed.

What others have to say?

Industry veterans, working with other brokerage houses, have urged clients to double up their due diligence, going forward. Jaideep Hansraj, Managing Director and CEO of Kotak Securities, believes that the financial services industry is all about trust. “Investors need to follow the basics and ask the important question, can the institution they want to do business with and its management be trusted with their hard-earned money?” he added.

Giving a piece of his mind on choosing the right brokerage firm, Hansraj says, “dealing with established players with good governance practices is always a better option. Safety should come before commercials and geographical convenience”.

Many believe that the issue with KSBL was mainly the acute funds shortage faced by the company. A few employees have also reported instances of delays in payment of performance incentives and pay checks, over the past couple of months. It is believed that the company resorted to such practices to meet its cash crunch.

In this backdrop, Hansraj says, Kotak Securities is a well-capitalised broking house with a net worth of over Rs 4,000 crore, and a subsidiary of Kotak Mahindra Bank Ltd. “We strictly segregate client's stock from ours, by keeping their stock in their individual demat accounts. In fact, till date, we have neither pledged clients’ stock with any bank/NBFC to borrow nor with the Exchange /Clearing Corporations, which is a common practice in the industry. Reputation is far more important for us than commercial gain, and hence our clients can be assured that they are doing business with a trusted institution,” he added.