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Majority of Karvy clients get back pledged shares

Mumbai: Share depositories have transferred the majority of shares owned by clients of Karvy Stock Broking back to their demat accounts after a directive from Sebi, said two people with direct knowledge of the matter.

The shares, which were illegally pledged with lenders, were deposited back into the investors’ accounts before Karvy’s creditors could stake claim. Bajaj Finance — one of the lenders to Karvy — has challenged the Sebi directive in the Securities Appellate Tribunal (SAT), which heard the matter and reserved its order till December 3.

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.

Pre-emptive move by Sebi

“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.

The Sebi directive has spooked lenders, which are gearing up for a legal battle. Bajaj Finance was the first to get moving on Monday with its plea in SAT. Other lenders such as ICICI Bank, HDFC Bank and IndusInd Bank are expected to approach SAT soon.

Bajaj Finance declined to comment. Emails sent to ICICI Bank, HDFC Bank and IndusInd Bank remained unanswered till press time Monday.

In its November 22 order, Sebi had termed the pledging of client securities with lenders as ‘invalid’.

“Sebi had a meeting with all the lenders to Karvy. Banks have been careless in their lending practices by giving loans against clients’ shares,” said another person familiar with the development.

As per NSE’s interim investigation report to Sebi, securities worth about Rs 2,300 crore belonging to more than 95,000 clients were transferred to one demat account of Karvy Stock Broking, which was never disclosed to stock exchanges. The regulator alleged that fully paid securities of clients were also pledged by Karvy to generate funds for group entities.

ET had reported on November 27 that Karvy had pledged client securities worth Rs 2,800 crore some months ago, but that this has now come down to Rs 2,300 crore.

The Sebi order of November 22 said NSE had conducted a ‘limited purpose inspection’ of Karvy Stock Broking between January 1, 2019, and August 19, 2019. Mishandling of client securities by Karvy and a few other brokers is said to have prompted Sebi to ask brokerages to segregate client securities from the firms’ pool accounts.

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