NSE terminates Karvy’s brokerage license, other exchanges expected to follow suit

The National Stock Exchange (NSE) terminated the brokerage membership of scam ridden Karvy Stock Broking with effect from Monday. The development comes after the exchange conducted a detailed probe into the Karvy matter that spanned for nearly a year. People privy to the development said the move was part of a coordinated effort between various market institutions and other exchanges too are expected to come up with similar orders against Karvy in the next few days. Karvy also holds a share brokerage license from BSE and a commodity trading license from MCX.

“All members are hereby informed that the following trading member(Karvy) has been expelled from the membership of the Exchange under Rules 1 and 2 of Chapter IV of the NSEIL Rules and has been declared as a defaulter,” said a press statement by NSE.

Last year, market regulator Securities and Exchange Board of India(Sebi) had passed an order against the Hyderabad-based brokerage asking it not to take up any fresh clients. The order came after Sebi and exchanges received a lot of complaints from the clients of Karvy alleging that the brokerage had misappropriated their securities to avail loans.

As of December 2019, there were around 3.3 lakh clients for Karvy. Amongst them, securities of around 2.3 lakh clients were returned in December itself following an order by Sebi. Subsequently, the exchange is learnt to have compensated a bulk of the remaining investors through liquidation of Karvy’s market assets and through investor protection and education fund (IPEF).

“All the small investors who had balances up to Rs 30,000 have been fully compensated. The total dues of Karvy to the clients was around Rs 2,500 crore of which Rs 2,000 crore has been paid back to the investors,” said a person privy to the development.

The rest of the amount is pending due to litigation in the Securities Appellate Tribunal (SAT). A clutch of banks had moved the tribunal staking claim over the securities of Karvy since the brokerage had availed loans from them. “Once a final order is passed in the matter by SAT, another Rs 300 crore could be released to Karvy investors. The process could take another few months but every investor will be compensated,” said another person with the knowledge of the matter.

Sebi is already learnt to be in the process of formulating ways to recover dues from Karvy. The person cited above added that Sebi has powers to order freezing of bank accounts of both the brokerage and its top executives.