After the Karvy Stock Broking scandal, the National Stock Exchange (NSE) has issued an advisory to all investors on keeping their stocks and investments safe.
This comes after Karvy was found indulging in misappropriation of client funds.
In light of this, NSE has asked investors to ensure they receive pay-out of funds in their account within a day and be careful while giving any broker the power of attorney. It also advises investors not to keep funds idle with a stockbroker. NSE has also advised investors to keep checking messages sent by Bombay Stock Exchange (BSE) or NSE on a monthly basis regarding funds and securities balances reported by the trading member and immediately raise a concern if you notice a discrepancy.
Hyderabad-based Karvy is a stockbroker, which means that it is the middleman between an investor and the stock exchange to buy and sell shares. It communicates to Bombay Stock Exchange or National Stock Exchange on behalf of an investor to execute buying or selling of a share. Investors (also referred to as clients) give Karvy power of attorney (basically the authority) to debit the shares directly from the client's demat account. These shares are held either in National Securities Depository Ltd (NSDL) or the Central Depository Services India Ltd (CDSL), the two depositories in India. Think of them as banks.
In what could be one of the biggest cases of misappropriation of funds by a stock brokerage, SEBI issued an interim ex-parte order against Karvy, banning it from accepting new clients. It has also directed NSDL and CDSL to stop honouring instructions given by Karvy.
So, SEBI asking CDSL and NSDL not to honour instructions given by Karvy essentially means that Karvy cannot execute transactions on behalf of its clients.
The allegation against Karvy is that it misused the shares of its clients to fund its real estate arm. Karvy also allegedly transferred shares from client accounts to their own account without routing it through the stock exchange. As per reports, Rs 1,096 crore was transferred from KSBL to its real estate arm between April 1, 2016 and October 19, 2019.
Following this, NSE, BSE Multi Commodity Exchange (MCX) and MSEI suspended Karvy Stock Broking Limited due to non-compliance of regulatory provisions of the stock exchange with effect from December 02, 2019.
SEBI is also reportedly reviewing a large number of complaints from clients on misuse of power of attorney and shares being pledged without consent.
Here is the complete advisory:
• Ensure that pay-out of funds/securities is received in your account within one working day from the date of pay-out.
• Be careful while executing the Power of Attorney (PoA) - specify all the rights that the stockbroker can exercise and timeframe for which PoA is valid. It may be noted that PoA is not a mandatory requirement as per SEBI / Exchanges.
• Register for online applications viz. Speed-e and Easiest provided by Depositories for online delivery of securities as an alternative to PoA.
• Ensure that you receive Contract Notes within 24 hours of your trades and Statement of Account at least once in a quarter from your Stockbroker
• Please note that securities provided by you towards margin are not permitted to be pledged by your Stockbroker for raising funds.
• If you have opted for running account, please ensure that the stockbroker settles your account regularly and in any case not later than 90 days (or 30 days if you have opted for 30 days settlement).
• Do not keep funds and securities idle with the stockbroker.
• Regularly login into your account to verify balances and verify the Demat statement received from depositories for correctness.
• Check messages sent by Exchanges on a monthly basis regarding funds and securities balances reported by the trading member and immediately raise a concern if you notice a discrepancy.
• Always keep your contact details viz. Mobile number / Email ID updated with the stockbroker. You may take up the matter with Stockbroker or Exchange if you are not receiving the messages from the Exchange or Depositories regularly.
• If you observe any discrepancies in your account or settlements, immediately take up the same with your stockbroker and if the Stock Broker does not respond, take it up with the Exchange or Depositories.