After Karvy fiasco, brokerages reach out to investors, issue PoA advisories

The Karvy scandal has led to a crisis of confidence in the Rs 15,000-crore domestic broking industry, with several investors fretting over the safety of their securities in demat accounts.

To assuage concerns, most brokers have or are in the process of reaching out to their clients, clarifying their position on the use of client funds and pledging of securities. At the same time, the National Stock Exchange (NSE) has issued an advisory to investors to remain vigilant with regards to pay-in and pay-outs of shares, and cautioning them over the use of power of attorney (POA). 

The concerns were triggered by the developments at Hyderabad-based Karvy Stock Broking, whose broking license has been suspended for misuse of client securities worth over Rs 2,300 crore. Other little-known brokers, too, have faced regulatory wrath for similar wrongdoing, while more brokers are currently being probed by the Securities and Exchange Board of India (Sebi). 

“Investors get shaken with such kind of incidences. Today, it is Karvy, tomorrow it could be someone else,” said Deven Choksey, managing director of KR Choksey. 

“The current flow of work, where brokers perform clearing and custodial duties, leaves scope for manipulation. The processes need to be relooked at, to avoid similar scandals in future.”

Until recently, it was a common practice among the broking community to pledge client securities as collateral for other more active clients, or for proprietary trading. Karvy is alleged to have gone beyond by using its client securities to raise money for its other businesses, including real estate. 

Most leading brokers Business Standard spoke to, including Zerodha, HDFC Securities, ICICI Securities, Sharekhan, Edelweiss Broking, Motilal Oswal, and Upstox, said that they are either entirely not into margin funding or ensure proper client account segregation. 

“The Karvy episode is unfortunate and seeing the swift action taken by Sebi, we hope the issue gets resolved at the earliest. At Edelweiss Broking, we maintain clear segregation of client collaterals. Edelweiss does not indulge in prop trading. We do offer Sebi-permitted margin trading facility to its clients, which is completely out of its own funds only,” said Rahul Jain, head (personal wealth advisory), Edelweiss.

“We think this is an isolated event due to weak corporate governance and poor compliance,” said a Motilal Oswal Financial Services spokesperson. 

“We don’t do prop trading and do not pledge securities belonging to its clients for raising funds.” Some brokers said that given the sensitivity of the issue, they are going slow when it comes to sending out mailers to clients. However, they have instructed their officials to assuage client concerns by stating their practices on use of client funds, they said.

The NSE has issued a 10-point advisory that includes “do not keep funds and securities idle with the stock broker” and “regularly login into your account to verify balances and verify the demat statement received from depositories for correctness”.

Market players said the Karvy fiasco could lead to investors moving to look bigger and established brands in the broking space. Some players are already luring clients by launching offers on transfer of stock holding.

For instance, ICICIdirect.com if offering free brokerage of up to Rs 25,000 on transfer of stocks to ICICIDirect demat account, while Kotak Securities is offering free transfer of stock holding on opening a “3 in 1” account.