Karvy crisis: What clients should do with holdings in their demat accounts

If demat holdings are intact, then Karvy's clients have the option to move to another broker. If not, they should complain.

A November 22 ex-parte interim order by the Securities and Exchange Board of India (Sebi) banned Karvy Stock Broking Limited (KSBL) from taking on new clients. It also barred the broker from using its power of attorney (PoA) to withdraw shares from clients’ demat accounts. Besides causing fear among clients that their securities may have been misused and they may suffer losses, the incident is also causing inconvenience as clients are finding it difficult to transact.

What happened: From a reading of the interim order issued by Sebi, it appears that KSBL pledged its clients' securities with banks and NBFCs to raise money. “Pledging of clients’ securities was banned by Sebi through a June circular,” says Shrey Jain, founder, SAS Online, a Delhi-based discount broking firm. 

When a client opens a demat account with a broker, he signs a limited power of attorney (PoA). Whenever he gives a sell order, there are two ways in which shares can be delivered from his demat account. He may sign a delivery instruction slip (DIS) and give it to the broker. But doing so is slow and cumbersome. So, clients give a limited PoA to brokers, which gives them the authority to debit stocks from the client’s demat account and deliver them to the exchange. Going by Sebi’s order, it appears Karvy may have misused the PoA to withdraw securities from clients’ demat accounts. 

The money so raised was credited to the broker’s own bank account. Sebi rules require brokers to report all their bank and demat accounts, which Karvy failed to do. Proceeds from sales of clients’ securities may also have been transferred to a real estate arm.

Sebi’s ex-parte order says Karvy cannot exercise PoA to execute transactions on clients’ behalf. This has left clients hamstrung. To sell, they may have to hand over DIS to the broker, which would be cumbersome.  

What should clients do: Clients should ascertain whether the holdings in their demat accounts are intact. “Look up the latest consolidated account statement (CAS) sent by the depositories each month,” says Jain. 

If all the stocks you have purchased are there, you should find out if there have been any unauthorised transactions. Request Karvy to generate a statement of transaction for your demat account for the past three years. If shares have gone out or come in, that will show up. “Withdraw idle funds lying in your trading account immediately,” says Tejas Khoday, CEO and co-founder, FYERS. 

Next, open an account with another broker and obtain a client master report (CMR) from it. Submit a copy of the CMR to Karvy and initiate a closure cum transfer request. “If you just transfer securities from one demat account to another, you will have to pay a transaction charge of 3-10 basis points. But a broker cannot charge you for closure cum transfer,” says Venu Madhav, chief of operations, Zerodha. No capital gain tax will be levied from the customer on such a transaction. 

If demat account has been affected: In case of any grievance, file a complaint with Sebi on its SCORES (Sebi Complaints Redress System) web site. If the holdings in your demat account have been misused, complain to the depository also. If a stock you purchased has not been credited to your demat account, complain to the National Stock Exchange (NSE). 

Karvy officials have said they are selling shares to repay customers. In case it is not able to do so, investors could be compensated out of the Investor Protection Fund maintained by the exchanges (to the extent of Rs 25 lakh per investor per defaulter/expelled member).

Keep a tab on holdings: Keep your mobile number and email ID with the broker and the depository updated. Whenever there is a transaction, the concerned depository sends out an SMS message. Check it to keep an eye on activities in your demat account. Similarly, look at the contract notes sent by the broker and the consolidated account statement (CAS) sent each month by the depository. “Inactive investors who do not to keep an eye on their accounts are the ones who tend to be defrauded,” says Vikas Singhania, executive director, Trade Smart Online. He adds that those with CDSL accounts can use EASI to view their demat holdings. Those who don’t plan to trade at all can even freeze their demat accounts by submitting a request to their broker.

Finally, watch out for red flags like pay-out delays, or if the broker does not do quarterly settlements (return clients’ money lying with him). Too many complaints on social media should also make you wary. If when you place an order, you get the message once too often that your order cannot be executed as your broker has been put on risk reduction mode, that too should make you wary as it indicates that your broker has touched the margin utilisation limit of 85 per cent with the exchange.

Five steps Karvy customers should take:
 

• Check the latest consolidated account statement sent by your depository to see if the shares purchased by you are there in your demat account

• Ask Karvy for a statement of transaction for your demat account for the past three years. This will tell you if unauthorised transactions have happened in your demat account 

• To move out of Karvy, open an account with another broker and get a client master report (CMR)

• Put in a closure cum transfer request to Karvy along with a copy of CMR

• If your account holds fewer securities than you think there should be, file a complaint with Sebi on its SCORES web site and with NSE