Karvy stock broking firm scam, PPL involved, how auditor found it, steps taken by government, how the scam happened, who all were involved, what was the amt, how the case rested, till how much time it was going on, what levels of connection were there

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Case Study on-
Karvy Stock Broking Ltd
FRAUD
S u b j e c t : A u d i t i n g
F a c u l t y : B i n c y m a ’ a m

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Made by:
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Background of the fraud:
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1: How the company was started
• In 1983, five men, who were working as chartered accountants decided to start
their own venture called Karvy Stock Broking Ltd (KSBL) in Hyderabad.
• Karvy soon grew into a giant financial services company in India providing
services such as equity, commodities trading, depository and wealth
management. It soon got launched in various countries such as Bahrain, Dubai,
Malaysia, Philippines and the United States.
• In the mid-1990s, Karvy entered stockbroking and advisory businesses. Being
there for many years, Karvy gained the trust of a million Indians who invested
in the financial company.
• However, this romance was soon to end when in November 2020, the
Securities and Exchange Board of India (SEBI) barred Karvy from purchasing
and accepting any new shares.

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2. karvy’s Betrayal
. In November 2020, Karvy Stock Broking Ltd (KSBL), from its pool account, took hundreds of Shares
from dormant demat accounts. Dormant demat accounts are those that have been. Inactive for many years
• With the help of POA, Karvy took the shares and presented it as a security to the banks such as ICICI
bank, HDFC bank, Indusbank etc. The loan money obtained from the banks did not go to the dormant
accounts but instead invested in Karvy’s real estate business.
• Karvy clearly violated market regulations. It defaulted 2,300 crores of as many as 95,000 dormant client
accounts.
• When the issue came into light, SEBI barred Karvy from taking any new clients and further trading.
Continued….

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How the fraud was detected:
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• Karvy Group was established in 1983 and the group has around 30,000 customers with 900 offices
present in 400 cities and towns all over India.
• So basically Karvy group has got multiple subsidiaries in various businesses under the finance domain.
• Some of its subsidiaries include:
• Karvy Stock Broking Limited which is the broking arm of Karvy group and provides equity broking
service along with other services like wealth management services, portfolio management services, etc.
• Now that you understand the various businesses of Karvy, it would be easy to understand the fraud.
• So basically, Karvy did 2 frauds:
• 1st, it misused its client shares and pledged them with banks to get loans.
• 2nd, Karvy also sold its client shares and transferred the proceeds to its real estate group company.
• The total misuse of client securities was to the tune of ₹2,800 crore.

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Continued:
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• So basically, Karya created a demat account in its own name and used the power of attorney to transfer stocks from clients
account to its own demat account.
• Then Karvy went to financial companies like Bajaj Finance, HDFC bank, etc. and pledged those stocks to secure the loan.
They belonged to its client. But banks and NBFCs had no clue about it. So the banks and NBFCs handed over the cash to
Karvy against the stocks as collateral.
• The four players - HDFC Bank, ICICI Bank, IndusInd Bank and Bajaj Finance, gave loans of Rs 340 crore each based on these
securities as collateral.
• The estimated misuse of securities was in the tune of around 2800 Crore. So Karvy pledged around Rs 2800 crore worth of
shares to secure the loan.
• After the scam was identified, Karvy was asked to pay back the money to its clients but Karvy defaulted in payments. The
default is in the range of Rs 800-1,000 Crore. As a result, Karvy’s stock broking membership was terminated by NSE and
BSE.

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Investigation and Timeline
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• Six financial firms, including three banks, which lent Rs 780 crore in loan to Karvy Stock Broking Ltd (KSBL),
have engaged a firm to ascertain how the money was diverted, even as police said they will seek custodial
interrogation of KSBL chairman and managing director C Parthasarathy.
• Probing the bank default case, the Hyderabad police said on Friday they are also waiting for the audit report,
before taking further action.
• While three banks came forward to lodge a police complaint, three more financial companies have also lost their
money by issuing loans to KSBL, who in turn allegedly pledged its client shares as security deposit for the loan

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Continued....
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• In December 2019, soon after the scam came to light andSebi worked with DPs and stock exchanges to
transfer securities of nearly 83,000 out of the over 95,000 scam-hit KSBL clients from Karvy’s demat
account back into their respective accounts.
• In November 2020, NSE said it had settled claims worth Rs 2,300 crore to around 2.4 lakh KSBL
investors with fund balances of up to Rs 30,000.
• In early 2021, under directions from Sebi, KSBL’s demat accounts were auctioned off to IIFL Securities
and its trading accounts were auctioned to Axis Securities as part of efforts to compensate investors.
• Earlier, on January 27, 2022, the Enforcement Directorate (ED) had arrested Parthasarathy and G Hari
Krishna, CFO of the Karvy Group in a ₹2,000 crore Security Scam

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Government failure & Internal control
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• Karvy Stock Broking transferred without authorisation the securities worth Rs 2,300 crore of more than
95,000 clients into one of its pool demat accounts, misusing the Power of Attorney given by its clients
during opening of demat account with Karvy. The details of such pool demat account was never disclosed
by Karvy in its filings with the stock exchanges.
• b) Karvy moved clients’ pledged shares (against which they receive margin funding from the broker) to
its own account via off-market deals and transferred a net amount of Rs 1,096 crore to its group company,
Karvy Realty Private Limited between April 1, 2016, and October 19, 2019.
• c) Securities of clients (inactive clients) were also pledged with financial Institutes by Karvy to generate
funds for group entities.

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Continued….
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• A new regulation that was brought in June 2019 barred brokers from pledging client securities to other financial institution.
Many brokerage firms were using this route to do their margin funding business. Starting June, brokers have to put their own
capital, which means they can lend only their own free cash, which isn’t much for most brokerage firms.
• The regulation also required all brokers to unwind any such already existing positions with Financial Institution by end of
September 2019, which meant that the broker had to return funds to the Financial Institution and then release the pledge on the
shares. This has affected several brokers, especially those whose business model revolved around margin funding.
• The new regulation specified that the securities lying with brokers for non-receipt of payment from clients can neither be used
by the broker as collateral margin for any of the proprietary trades nor it can be pledged with financial institutions. Brokers
were supposed to release such pledges by August 2019 or give a valid reason to continue it. The deadline was further extended
to September 2019. Consequently, this move has hit most brokers who were continuously involved in such practices and don’t
have enough funds to evoke these pledged securities.

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Current status
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• The Bombay Stock Exchange and the NSE have suspended the broking membership of Karvy. The NSE is
conducting a forensic audit to ascertain further details regarding alleged misuse of client securities
• . Karvy Stock Broking filed an appeal at SAT to challenge its suspension, but the appeal was dismissed with Karvy
being directed to file an appeal with the NSE.
• The coming week would see the regulator decide on the appeal filed by the lenders from whom Karvy Stock
Broking raised funds by pledging client securities.
• The capital market watchdog will take further action against Karvy Stock Broking as well since the earlier order
was only an ex parte interim orde

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Continued…
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• Sebi banned Karvy Stock Broking Ltd for pledging clients’ shares and transferring Rs 1,096 crore worth
of clients’ securities to its group company Karvy Realty Pvt Ltd without their consent. The incident has
worried retail investors who are bombarding their brokers with questions and pulling out their contracts
• In a statement, the ED stated, "In order to safeguard the proceeds of crime from alienation, ED has
identified and attached and seized movable assets totalling ₹110.70 crore. Thereby total attachment of
₹2,095 Crore has been done in this case. Further investigation is in progress.

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Recommandation:
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• Karvy had pledged securities worth Rs 2,300 crore of over 95,000 clients with ICICI Bank, HDFC Bank, IndusInd
Bank and Bajaj Finance as collateral to raise over Rs 600 crore in loans for itself. This was revealed in the Sebi
probe into client positions of select retail brokers, which is yet to be published. In an ex-parte order on November
22, Sebi barred the Hyderabad-based financial services firm from taking on new clients.
• On Monday, depositories transferred securities worth Rs 2,013.77 crore to 82,559 clients of Karvy, said one of the
persons. This represents 87 per cent of the impacted clients. The shares returned on Monday include those that
were paid-for by the clients but had been unlawfully pledged by misusing their power of attorney.
• “If Sebi hadn’t taken this step, Karvy’s lenders would have staked claim on these securities,” said a person close to
the development. “Before that could happen, Sebi directed depositories to return the securities,” the person
added.NSDL, one of the depositories, said, “As per the directions of Sebi and under supervision of NSE, securities
have been transferred from the demat account named Karvy Stock Broking Ltd to the demat accounts of
respective clients who have paid in full against these securities.” Karvy has 1.2 million clients, of whom around
300,000 are active.

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Thank You.