Mumbai: Lenders to Karvy Stock Broking Ltd have started exploring other avenues after failing to secure any relief from the Securities and Exchange Board of India (Sebi) on client shares pledged by the brokerage.
The options include filing pleas with the Debt Recovery Tribunal (DRT) and Insolvency and Bankruptcy Board of India (IBBI), and selling minority stakes in sister concerns of Karvy. A total of seven entities have lent more than ₹1,400 crore to the brokerage against share collateral worth ₹2,319 crore.
“Most of the lenders have decided against appealing Sebi’s decision as by now majority of shares have been transferred to client accounts and are out of their reach,” a person with direct knowledge of the matter said on condition of anonymity. “In addition to shares, the lenders had taken other assets as collateral which can be used for recovery.”
On 22 November, Sebi barred Karvy from acquiring new clients and from using power of attorney, thereby preventing the company from trading on behalf of clients, after the broker allegedly transferred clients’ money for other purposes and indulged in trades that were not authorized by them. Karvy had, instead of pledging its own shares, pledged shares belonging to clients and used them to raise funds. These funds were then transferred to its sister concerns such as Karvy Realty Ltd.
ICICI Bank Ltd on 20 December became the first lender to approach the Hyderabad DRT for recovery of dues. If the broking firm does not deposit an equal amount of collateral with the tribunal by 5 January, assets of Karvy and its promoters can be attached. Other lenders that hold similar collaterals could also initiate similar recovery proceedings.
“At least three other lenders are also likely to approach DRT in the coming two weeks to recover their dues,” said the person cited earlier.
Karvy Group’s former chairman and managing director, C. Parthasarathy, and director Rajat Parthasarathy have already been issued notices to submit their passports, restraining them from leaving the country during the case proceedings. They have also been asked to disclose their assets to the tribunal. Karvy owes ICICI Bank ₹642 crore against a loan facility of ₹700 crore. The amount was due in November but the brokerage missed the schedule. ICICI Bank could not invoke the pledged shares as they belonged to clients and Sebi through its 22 November order prevented their transfer except to beneficiary owners.
Another lender, Bajaj Finance Ltd, is pursuing recovery of its ₹325 crore loan by invoking shares pledged with sister concerns. It had invoked shares of Karvy Data Management Services Ltd (KDMSL) on 19 December, which were pledged by Karvy to raise funds from the lender. In a stock exchange filing, Bajaj Finance said it has invoked 2.4 million pledged shares of KDMSL, representing a 10% equity stake in the company. Bajaj’s recovery was due on 23 November, just a day after Sebi passed its order.
HDFC Bank, IndusInd Bank and Axis Bank are the others that had lent to Karvy. HDFC Bank had extended a loan facility of ₹350 crore to Karvy against shares and other collateral and IndusInd Bank has pending dues worth ₹132.50 crore. Axis Bank is seeking to recover ₹81 crore from Karvy.
Sebi is slated to decide on Axis Bank’s plea seeking ownership of pledged shares by 15 January. The markets regulator is, however, unlikely to deliver a verdict that would vary from its 13 December order issued following the representation by other lenders.
In the 13 December order, Sebi observed that all the pledged shares came from client accounts and the lenders did not exercise proper “due diligence”. While extending loans against shares, the banks failed to notice that the bulk of pledged shares did not come from the “proprietary account” but from the “non-house” account.
Karvy is accused of misusing client securities worth ₹2,800 crore to secure loan facilities from lenders towards meeting working capital needs.
The brokerage also sold off client securities and transferred some of the proceeds to its real estate group company.