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Karvy fiasco: NSDL's decision to transfer securities puts lenders in a spot

NSDL has transferred securities, against which loans were given, to clients

Samie Modak & Jash Kriplani  |  Mumbai 

Karvy fiasco: NSDL's decision to transfer securities puts lenders in a spot

The decision of National Securities Depository (NSDL) to transfer securities from Karvy Broking’s demat accounts to client accounts has caught lenders on the wrong foot.

While the depository’s move is to safeguard investors, it has jeopardised the interests of the lenders, who had given loans to Karvy with the same shares as collateral.

“According to the directions of Sebi (Securities and Exchange Board of India) and under supervision of the (National Stock Exchange), securities have been transferred from the demat account of Karvy Stock Broking to the demat accounts of respective clients who have paid in full against these securities. The number of such clients is 82,559,” NSDL said in a media release.

Following this, Bajaj Finance hurriedly moved the Securities Appellate Tribunal (SAT) challenging the move. According to sources, the non-banking financial company had lent about Rs 250 crore to Karvy, oblivious to the fact that the brokerage had illegally transferred client securities to its own account to avail of this loan.

Shares of Bajaj Finance fell over 3 per cent on Monday amid fears of exposure to Karvy. The tribunal is expected to pronounce its order in the matter on Tuesday.

Legal experts said the decision could have wide repercussions for the loan against share market.

Sources said other lenders to Karvy, too, were expected to move the SAT against NSDL’s action. The brokerage reportedly has availed of loans against securities from ICICI Bank, IndusInd Bank, and HDFC Bank.

Karvy allegedly raised over Rs 600 crore by illegally pledging securities belonging to 95,000 of its clients worth more than Rs 2,300 crore.

NSDL has transferred shares of 82,559 (87 per cent) of Karvy’s clients who don’t have any payouts due.

“Loan against shares is a form of secured lending. The lenders had given loans thinking Karvy was the rightful owner of the securities as these were held in the brokerage’s account. The transfer of these securities from Karvy’s account to clients will leave them with no collateral,” said a legal expert. In normal circumstances, lenders invoke shares if the borrower fails to pay. However, in this case they won’t have any pledged shares left, he added.

Exchanges suspend Karvy’s broking licence

The stock exchanges on Monday suspended the licence of the Karvy Group’s broking business for non-compliance with norms. This could mean curtains for the Hyderabad-based financial services major.“The has suspended Karvy Stock Broking (KSBL) because of non-compliance with the regulatory provisions,” the exchange said in a circular. The BSE, too, followed the NSE’s actions. The suspension is for cash, equity, commodities and currency derivatives and debt segment.

Officials at stock exchanges said KSBL clients will be allowed to square off their open positions in the derivatives segment.

However, to take fresh positions or to buy and sell in the cash segment, clients will have to open a new trading account with a broker. KSBL’s suspension could hit thousands of clients.

“Karvy has 1.2 million clients, of which 300,000 are active. On an average, 20,000-25,000 clients transact on a daily basis,” the brokerage had told Sebi last week. Sources said after Sebi’s order, exchanges had initiated proceedings against KSBL. The brokerage could not be reached for comments.

First Published: Mon, December 02 2019. 11:48 IST