Karvy case: How you can safeguard your stock and MF holdings from brokers’ shenanigans

The investment community woke up to a rude shock last Friday. The capital market regulator, the Securities Exchange Board of India (SEBI), banned Karvy Stock Broking (KSB). Acting upon a recently-concluded audit by the National Stock Exchange, SEBI found that Karvy Stock Broking had fraudulently pledged the shares of some of its clients – after transferring the shares from their demat accounts without informing them – and raised funds, which were transferred to one of its sister firms, Karvy Realty Pvt Ltd.

The SEBI order stated that KSB transferred roughly Rs 1100 crore to its group company, Karvy Realty, between April 1, 2016 and October 19, 2019.

The order further states that Karvy Stock Broking transferred securities worth Rs 27.8 crore in off-market deals from demat accounts of 156 clients, who had not executed even a single trade with them. Additionally, securities worth Rs 116.3 crore were transferred from 291 clients who hadn’t traded with Karvy since June 1, 2019.

Note how Karvy Stock Broking moved shares from dormant demat accounts. That puts many investors, especially senior citizens, at risk and those who do not buy or sell shares frequently.

Even so, you can still take steps to secure yourself from such frauds and make your demat account safer.

You can definitely use technology to help yourself better. Update your email address and telephone number with your broker and depository participant. When a trade is executed or when a security is transferred, the investor receives an alert. “Trade confirmation, ledger balances, stock statements need to be communicated to the investor from time to time,” says Prakash Gagdani, chief executive officer of 5 Paisa.com, a discount broking firm. Failure to do so is a serious compliance lapse, he added. If you have registered your contact details, you will get all the information about the transactions in your account. Keep a track of such text messages and emails; don’t delete such messages without looking.

Every time you buy or sell a stock, the stock exchanges also send out trade confirmation messages to the investors. Make sure you reconcile the information given out by the exchange with the information provided by the broker. If there are discrepancies, you should dig deeper.

Brokers are expected to pay-out the cash balance of investors lying with them at least once in 90 days. If the broker is not doing that or fails to inform you about the ledger balance or the stock statements, you may be at risk. Ask the broker to furnish this information on a regular basis.