Karvy Group's mistakes likely to cost firm stock broking business

When the issue of delay in client payouts started figuring in social media posts a couple of weeks earlier, C Parthasarathy, chairman and managing director of Karvy Group, told his stockbroker group in Hyderabad that everything was alright with his business.

He continued to be in denial of any issues or actions of a non-compliant nature involving Karvy Stock Broking (KSBL) even after the Stock Exchange Board of India’s (Sebi)’s Friday order. That was based on preliminary findings that KSBL seemed to have used client money and shares for own trades and pledges. 

The full picture will emerge only after a detailed investigation into this. A couple of circulars issued in quick succession by Sebi — the first one regarding mapping of the Unique Client Code and the second one on reporting of margins by trading members, on November 15 and November 19 — was part of an immediate damage control effort of the markets regulator, after it found something wrong with KSBL transactions, say analysts. Sebi’s orders to stop the Hyderabad-based brokerage from taking any new clients followed thereafter.

KSBL is among the country’s top 10 brokerage companies, with 244,000 customers in the country. Broking is perhaps the only sizable business left with the group after it sold the registrar and transferee entity, Karvy Fintech, to American private equity investor General Atlantic for about Rs 1,000 crore last year. If any misuse of client money and shares by KSBL is established in Sebi’s investigation, it will be hard for the company to regain client trust, central to the business.

“People have already started drawing parallels with the fraud by promoters of the erstwhile Satyam Computers, as the Sebi orders pointed to the transfer of Rs 1,096 crore to group firm Karvy Realty between April 2016 and October 2019,” said a brokerage firm’s analyst, on condition of anonymity.

Though it is not fully clear if the amount in question entirely belonged to clients, the mention of Karvy Realty as receiver of these funds led people think the money might be invested in some realty deals whose fate is not known. The roots of the Satyam corporate fraud were also traced to land deals.

According to people in the know, Karvy Realty was mostly into intermediation and not known for any big deals or projects on its own, at least in Hyderabad city. It was one of the 21 companies started by this 35-year-old group. According to the public information, the group has a little more than 30,000 employees spanning 900 offices in the country. Besides the broking business, the group is present in distribution of financial products, as a depository participant, commodities broking and wealth management, among others.

A qualified chartered accountant, Parthasarathy co-founded Karvy in 1983 with M Yugandhar and M S Ramakrishna, with registrar and transferee services as their first and most successful business. Karvy started brokerage services in the mid-1990s. The company was subject to extra regulatory scrutiny on a couple of occasions. Sebi had in 2016 acted against the company for an alleged Initial Public Offer fraud at one of Karvy’s branches in Gujarat. It was alleged that the manager of the branch had applied for shares in the name of fake applicants and sold these for a premium after the allotment.  Though very close to a ruling family of undivided Andhra Pradesh, Parthasarathy never seemed to have used political clout for furthering or diversifying his business interests. He mostly confined himself to his financial services businesses. 

When Y S Rajasekhara Reddy was chief minister, Karvy got a two-acre plot in the financial district here for a new corporate building.  The company had shifted its broking business to this new location. The promoters sold one of the existing office buildings in the city after moving part of the business to the new location.

As with some of its peers, Karvy started a margin funding business, where there is a potential for generating more money than in stock broking. As a broker was allowed to maintain a pool of client money and shares in a transition phase between the transactions, it gives him a chance to use these for own requirements, says an analyst.