The Karvy Securities Issue

Introduction

Karvy Securities is a broker of securities on the NSE/BSE. Many of their clients having accounts with them have seen their shareholdings not accounted for in the depository (demat accounts) and/or have not received cash for sale done. This is being investigated by SEBI and related regulators.

This is a short note that explains the basics of the market structure and what happened. Details can be found in some other publications.

Background

Before we understand what happened to investors and their holdings (and cash) held with Karvy securities, let us understand the institutions and account structure. 

Refer to Figure 1

·         A retail (or institutional client) executes trades (buy/sell) through a broker who is a member of the exchange.

·         The client holds an account with the broker which also includes a securities holding account called as the demat (dematerialization account).

·         These accounts are opened with the central depositories run by CDSL and NSDL. So, any stocks that you buy and once settled after you pay the stock balances are taken out or deposited into the client’s demat account.

·         The broker has control on the demat account via the Power of Attorney granted by the client when they open an account.

·         The broker also keeps an account of client transactions and this is what the end client sees when they login – this is the broker’s version of your account.

·         The actual account is held with CDSL or NSDL (the primary clearing houses for stocks in India and also the depository for stocks)

What happened?

What happened is Karvy, who has the client’s Power of Attorney, transferred your shares in the CDSL/NSDL account to other banks as a pledge (collateral) and borrowed money from them. This money was apparently given to their realty business. 

How is it that investors did not realize that their shares had been moved out? 

Because investors only (and usually) check their broker provided trading account. It appears what was shown to clients was incorrect and did not reflect the share balances (which were moved out) on the NSDL/CDSL.

This obviously is a breach of trust and possibly fraud. 

What should investors do to safeguard their stock accounts? 

1.    Reconcile their holding between their own records against the records held at CDSL/NSDL (R1)

2.    Check that after a trade (buy or sell), the CDSL/NSDL balances are updated to reflect the trade

3.    Check contract notes from the broker

4.    Check the notifications that come from NSE/BSE and CDSL/NSDL

How should one check the balances on CDSL/NSDL?

Create a login at CDSL/NSDL and check periodically that their purchases and other transaction affecting their share balance is correct and reflects their actual transactions.  

What about cash?

·         Cash is held by the broker and in an account held with the clearing house (run by CDSL/NSDL).

·         So again, check balances in the broker account and make sure it matches your own records.

·         Move out the balances held by the broker to your own bank account periodically especially if you hold significant cash balance.

·         It is easy these days to transfer money into your account held with your broker.

Any more queries or if you wish to get such notes, please send me an email at rshanx@gmail.com  

Thank you and good luck with investing!