The fraudulent incidents related to alleged misuse of clients’ funds and securities have been unnoticed till its full outgrowth has unfolded while another scandal hit the stock market after the most infamous incident with Allied Financial Services & IL&FS, as Karvy messed up big time!. Considering its repercussions on the stock market ecosystem market veterans str quoting it as one of the biggest cases of broker scandals in the equity segment and defaults to the tune of Rs. 2000 crore as per an ex-parte order of SEBI.
The news of Karvy’s wrongdoings & SEBI order came out when I was at CMT India Summit last weekend. During the course of these incidents, many people are expressing their wrath on social media channels and asking us about how they can deal with this situation. Some afflicted traders and investors are writing to find out about Karvy’s impenetrable modus operandi of misusing clients’ funds and securities and asking if they should be worried about their funds and securities with FYERS and other brokers. We totally understand the public’s concerns as there have been multiple such cases in the past wherein some brokers have used clients’ funds to meet the liability of another client or pledged their securities with banks to meet the margin requirement of other clients or their own proprietary obligations.
This is despite SEBI cracking the whip on the practices among the brokers to use client securities as collateral for another client’s trade or for proprietary trading and directing brokers to wind up all such accounts. We encourage all to be extra cautious while dealing in such scenarios or entities to safeguard against Demat account frauds.
The SEBI’s order
SEBI’s order barring Karvy Stock Broking (KSBL) on new clients, trading and settling trades on clients’ behalf pretty much bars Karvy’s operations as a stockbroker. The order was issued against Karvy for numerous violations of SEBI norms including –
- The transfer of clients securities to itself and pledging of clients shares to raise money for itself.
- Selling and pledging of securities from non-client accounts, and misusing client Demat securities to receive proceeds in Stockbroker own account instead of Stockbroker – Client account.
- Off-market transfer of client securities to non-client accounts.
Our Measures to protect our Clients’ Securities & funds
- Since our very inception, we have removed conflict of interests with our clients! We stayed away from proprietary trading, which is a common practice and prevalent activity in the brokerage industry. The conflict of interest can arise due to the movement of securities to and from client Demat account to the stockbroker’s own accounts for settlement obligations as per the exchanges’ processes.
- Some brokers often mis-utilize these securities and disguise it under activities such as margin funding. At FYERS, we never indulged ourselves in any such activities apart from our core business of broking. If and when we do start margin funding, we will do it in the most transparent way as per the rules set.
- Moreover, we embrace and diligently follow all the regulations of the capital market regulator – SEBI. When we got the Depository Participant (DP) license to start demat services earlier this year, I wrote a blog post highlighting our transparency and good compliance as the key differentiating factors as compared to other brokers. You can read more about it here. We have also written several articles in financial publications to spread awareness about demat accounts and ways to safeguard it. Here’s an article published in the Financial Express. We firmly believe in transparency and that it helps to avoid malpractices. We value your trust in us and the will to safeguard our clients’ interests, drove us to launch our own DP services and offer them in a completely transparent manner.
- We have never pledged any clients holdings for any other purpose than the clients’ purposes. Unlike the common practice in broking industry, we don’t keep clients’ securities in our pool account. All the securities are stored in our clients’ respective Demat account which is owned and operated by them.
- It is important to note that we don’t distinguish our clients by offering differential leverage or brokerage deals. All our policies are standard irrespective of the client. We don’t leverage ourselves to that extent just to offer fancy margins to attract clients. While margin offered by us is considering the risk factors and in moderation just to be in the game.
- The most important with regards to the misusing clients’ funds and securities, our stringent policies make sure that clients’ funds or securities aren’t moved without their authorization and therefore, never had any issue with it.
- Also, we are a zero debt company. Considering the nature of our industry and business model, we have stayed away from borrowing money to aggressively expand our business operations. This further reduces risk at a business level. It’s better to be safe than sorry!
If you faced this at any point, What you should do?
The clients’ can take a call on whether to open a Demat account with other transparent broker and move the securities that are with their Demat account. You can transfer your holdings to another demat account through Deliver Instruction Slips (DIS). If you have idle funds lying in your brokerage account try to withdraw it on a priority to safeguard yourself from further financial damage. If you are facing any hurdles in this regard, you can always get in touch with the Depositories, Exchange and even the regulator to make them aware of your situation.
Here are some safety measures for Demat account holders
- Make sure you keep a record of your account statements. What your passbook is to your bank account, DP holding and transaction statements are to your Demat account. A transaction statement of your Demat account gives details of all share credits and debits that takes place in your account during a particular period.
- The Debit Instruction Slip (DIS) booklet for the Demat account is just equivalent of your bank cheque book. While transferring your shares from one Demat account to another, you must sign the DIS. Hence you must ensure that you don’t leave your DIS booklet around or leave your signed DIS booklet with your broker, to avoid any chances of fraud.
- While opening Demat account with your broker, you must ensure that the broker is not directly or indirectly involved in proprietary trading. Involving in these trading activities; eventually, the broker has vested interest with your holding and points to conflicts of interest.
Karvy issue is under regulatory investigation and plenty of things yet to become clear. We hope this issue will get resolved at the earliest.
Tejas is the Co-Founder & CEO at FYERS, the youngest team to get NSE’s broker license. He has a specialization in finance and has over 10 years of work experience spanning across proprietary trading, risk management, and broking. Tejas & his team started FYERS, a technology-focused brokerage as a mission to transform the trading/investment landscape in India.