Karvy denies misuse of client funds, says only Rs 50 cr dues pending

The official said their clients are starting to worry after the Sebi order and the company is reaching out to them to explain the ground reality

Karvy Stock Broking (KSBL) owes Rs 40-50 crore to its clients and the money will be repaid over the due course, said a top official. The brokerage refuted claims that it has defaulted on loans worth Rs 2,000 crore. 

“We don’t know from where this Rs 2,000 crore figure has come. I would like to say all the securities are intact. All these will be credited into regular accounts. So investors don’t have to worry as to what will happen to their securities. There is no default in this particular case. The Sebi order says that the securities have not been dealt with properly,” said the official. 

On Friday, the Securities and Exchange Board of India (Sebi) passed an ex-parte interim order against KSBL, barring it from taking new clients for the alleged misuse of client funds. The official said some of the client shares were used for proprietary trading. “What we do is we sell on one exchange and buy it on another exchange. It is arbitrage. These are the things which have not been properly understood and will we explained the regulator soon. The number looks large as it is over a period of time. On a daily basis, it is a very small order,” the official said, adding that “Rs 40-50 crore of client money needs to be repaid and this will be done in the normal course.” The official said Karvy’s clients are worried after the Sebi order and the company is reaching out to them to explain the ground reality. 

“We are communicating to everyone that everything will be fine. As we clarify on all the aspects, we will be able to regain trust and things will be normal soon,” the official said.

Besides the Sebi rap, KSBL suffered a rating downgrade by ICRA. The official said the downgrade had nothing to do with the alleged misuse of client funds.

“Please note it is just a downgrade and not a default. The rating is for Karvy Stock Broking and its subsidiary companies. For subsidiary companies, the parent has to give a guarantee. But we are prohibited from giving a guarantee as it becomes a structured obligation under a new rule for brokers. Therefore, we haven’t given any guarantee,” the official said.

Industry players said several brokers are feeling the heat of Sebi’s move to debar Karvy from using client funds — a practice that was fairly rampant in the broking industry.

In June, Sebi cracked the whip on such practices, directing all the brokers to wind up all such accounts. It directed them to unpledge and return clients funds. Many brokers missed the August 31 deadline set by Sebi and also the extended deadline of September 30.