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SEBI has banned Karvy Broking from taking new clients and executing trades after payment defaults of Rs. 2000 Crores were detected. The ban was due to a preliminary report by NSE that Karvy Broking has misused (pledged/sold) client securities and funds for their own purposes. This is the SEBI Circular. Will this affect mutual funds as many AMCs are serviced by Karvy as Registrars and Transfer Agents (RTA)?
The short answer is no and investors have nothing to worry with regard to Karvy RTA which is independent of Karvy Broking. However, at this point in time, it is not clear if AMCs use Karvy Broking for their transactions and if their portfolio management has been affected by this fraud. This story will be updated upon further developments. There is no news/reason for investors to panic.
What is the role of Karvy as a Registrars and Transfer Agent?
The RTA is responsible for record maintenance. They keep track of investor KYC, purchases and redemptions and lower cost of operation for mutual fund houses. They also service investors and distributors with account statements.
The RTA does not hold the money or securities in a mutual fund. That is the role of the custodian as mutual funds are structured like a trust. See: Can Mutual Funds Fail (go bust) Like Banks?
Therefore the RTA wing of Karvy will not be affected by the ban on Kary Broking. At worst, they will be forced to shut down due to financial difficulties and AMCs may have to switch to another RTA. Investors need not worry about this development.
According to Kary Brokerage, they work with corporates and institutions. It is not clear if any mutual funds or insurance companies work with them and are affected by the dealings of the brokerage house. As of Jan 2019, Kary Brokerage was the 9th biggest brokerage house in the country with 270521 clients
As mentioned above, while this news is most disturbing for direct equity investors (esp those who work with Karvy Brokerage), there is no news/reason for mutual fund investors to panic.
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It’s just not the issue of clients’ shares being pledged by Karvy without the knowledge/ permission of the client, they have also not paid back the money to their clients who have sold shares! Thousands of clients are still awaiting payment including myself. They owe Rs 5.5 lakhs and when I phone them they keep saying it will be credited to my account in a day or two! The total amount due to clients could be in tens of crores!
This is happening in big corporates due to keeping costs lower in the competitive environment and accessing illegal funding at bad times. It is also failure of regulator to detect the wrong doing at the bud, many in the regulator act as a fixer. It is time to fix regulators like RBI, SEBI, IRDAI etc.
Right.
The scam was running since three years. Why SEBI was unaware !!!