Karvy in talks to sell stake in a company to honour client payouts

Karvy Stock Broking Ltd (Karvy), which is under regulatory glare for misusing client securities and not honouring investor payouts, is in active talks to sell stake in a company to meet the shortfall.

During an interaction post the meeting of its board, Securities and Exchange Board of India (Sebi) said that Karvy is currently facing a shortfall of ₹678 crore as outstanding dues to banks and investors.

Karvy has informed National Stock Exchange of India (NSE) that it is has signed a term sheet to sell stake in one of its companies. Using these funds the broking firm will clear the dues to investors by end of March, said Ajay Tyagi, Chairman, Sebi.

On 22 November, Sebi barred Karvy from acquiring new clients and using power of attorney, thereby preventing the company from trading on behalf of clients, after the broker allegedly used client money for other purposes and indulged in trades that were not authorized by them.

Karvy had pledged shares belonging to clients and utilised them to raise funds.

According to Sebi Karvy's total outstanding dues is ₹1,189 crore in which ₹694 crore is securities and cash us ₹495 crore. Out of this, only ₹511 crore is available and there is shortfall of ₹678 crore.

NSE is awaiting a forensic audit on Karvy and is yet to label Karvy as defaulter.

Sebi also introduced another step to prevent unathorised pledging of shares. Under the new norms even re-peldging of securities to meet margin requirement or settlement obligations would fall under the definition of a pledge.

Sebi recently introduced a system to monitor and detect misuse of client securities by stock brokers, following the debacle at Karvy.

Under the new system, an online register will record brokers’ holdings of client securities. The system is clubbing all the information of client securities collected by exchanges, depositories and clearing corporations pertaining to all types of trades such as auction trades, corporate actions, and off-market trades.

"The system has been up for about three weeks and the system has already generated three alerts. The exchanges are verifying this on their end whether it involves instances of misusing client securities," said an exchange official declining to be named.