SEBI has banned Karvy Stock Broking Ltd from acquiring new clients for the stock broking business, as it was found to be misusing client securities worth Rs 2,000 crores. This is one of the biggest cases of broker default in recent times, sending shockwaves through the stock broking community and putting crores of investor money at risk. Many investors are asking this question? Is my money safe with the stock broker?

Now, Karvy is one of the top 10 brokerage companies in India with around 2.5 Lakh customers in India. Karvy is alleged to have misused client collateral for its own trades. SEBI has banned Karvy, the Hyderabad based broker, from acting on behalf of existing clients or acquiring new ones, till the pending investigation is complete.

Karvy Stock Broking has claimed that it has not defaulted on Rs 2,000 crore loans and owes just Rs 50 crores to clients. The Karvy case has brought 36 stock brokers under SEBI radar. Karvy is not the lone culprit and this could be the tip of the iceberg. This is a rampant practice among stock brokers who enjoy power of attorney on your and other clients demat accounts. The stock broker with power of attorney is authorized to transfer client securities to the collateral account. SEBI has asked the depositories, NSDL and CDSL not to act on any instruction given by Karvy vis-a-vis power of attorney or PoA given by its clients. SEBI has asked NSDL and CDSL to monitor the movement of shares to and from Karvy client DP accounts. Karvy says just Rs 40 to 50 Crore needs to be repaid and will be done in normal course and doesn’t know where the Rs 2,000 crore figures have come from.

See Also: How your stock broker may cheat you?

How to protect your stocks and mutual funds from stock brokers?

SEBI has found that Karvy Stock Broking had fraudulently pledged client shares after shares were transferred from their demat accounts without informing them. Funds were raised against shares and transferred to Karvy Realty Pvt. Ltd.

What to do if you have Karvy demat account?

• Simply open a new demat account with another stock broker and move securities from the Karvy demat account.
• Any idle funds lying in the Karvy Brokerage Account must be transferred to your own bank account.
• Take a look at the 2009 SEBI circular where unutilized client funds must be transferred by your stock broker to your (clients) bank account, at least once every 90 days.
• Take a close look at trades, especially if any have failed because of Karvy defaults. If you notice any irregularities in Karvy demat and trading account, file a complaint with SEBI.

How was Karvy Stock Broking Scam done?

Karvy Stock Broking simply moved shares from dormant demat accounts. Investor’s especially senior citizens are at risk of this scam. If you don’t buy/sell shares frequently, you could be at risk of this scam.

The broker is expected to pay-out any cash balance lying with him, at least once in 90 days. If the broker fails to inform you of ledger balance or any stock statements, take this as a red flag. The broker must furnish this information on a regular basis.

How to keep demat account safe?

• Check shares in demat account for possible ‘leaks’ in demat account.
• All shares bought in every company must reflect in the portfolio. You get this information from demat account statement.
• Compare latest month’s statements with the previous month’s statements.
• The depositories NDSL and CDSL regularly send monthly consolidated statements to you and other investors. These statements show stock, bonds and other securities holdings in the demat account. You get details of all transactions during the month.

So don’t just rely on the broker.

Should I give broker power of attorney?

The power of attorney or PoA gives the broker the power to transact on your behalf. Now, a limited-purpose PoA allows the stock broker specific transactions like transferring shares which are sold through the broker on NSE and BSE. Off-market transfer of shares is excluded.

General PoA gives the broker the power to act as if he is in full control of the investment. Give general PoA in the name of a particular person and specify a time limit of 6 months to a year. Make PoA with restrictive clauses. This could be PoA for a limited amount, just for purchase of shares excluding off market transactions and prohibiting creation or pledge or lien.

See Also: Are your shares safe with the broker?

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