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Karvy scandal appears to have been almost too easy to pull off – Economic Times, The Times of India

Karvy scandal appears to have been almost too easy to pull off – Economic Times, The Times of India

By Dhirendra Kumar

Stock investorsare in a tizzy because of the Karvy scandal. Equity investing in India is difficult enough without worrying about whether the broker is going to take possession of your stocks, sell them off and appropriate the proceeds. According to the conclusion that aSebiinvestigation has come to, that is exactly what KarvyStock Brokingdid with several hundred crore rupees worth of shares that belonged to its clients. The shares were transferred from the clients ’depository accounts, sold off and the proceeds transferred to Karvy’s real estate business.

Going by what Sebi has found, it seems to be a particularly brazen and large scale heist, in all likelihood the largest ever malfeasance of this kind in the Indian equity markets. By itself, that’s not remarkable. As time goes by, the average of everything gets closer to the mean, while the extremes get more extreme. Every once in a while, one will get the largest this or that with some regularity.

However, what is truly galling about this scandal is that it is composed of individual actions that the perpetrators had the right to commit. Only when the end-results were detected by the victims did the fog started to clear and that took a long time. The strange thing, which everyone in this industry as well as the regulator seems to have accepted, is that it is impossible, in practice, to get a demat account and invest in equities without signing over an expansive power of attorney to the broker.

I’ve had personal experience of this just a couple of years ago when I started looking for a brokerage account where I did not have to sign over such a power to the broker. After wasting a lot of time skimming over literally hundreds of pages of legalese in tiny font sizes, I realized that this was basically impossible to have such an account and use it in a practical sense. That’s the root cause of the problem: to invest in stocks, you are forced to sign over control of your investments to the brokers.

As it happens, such an arrangement is necessary if you are a short-term punter and are trading on margin because then the broker needs to be able to sell off your investments without your consent if necessary. However, that is not the universal case. A lot of investors, like me, are just interested in buying stocks and holding them for months and years. I can’t understand why such investors have to sign over power of attorney rights to their investments to brokers. Personally, most investors I know and who use Value Research Stock Advisor are exactly this category. Sebi should seriously think of ensuring that such investors are able to retain the rights over their investments. For brokers, such investors are useless businesswise because they hardly ever trade. It’s up to the regulator to takecareof them.

The most worrying thing about this Karvy scandal is that there is never just one cockroach in the kitchen. Since such a thing is possible, it must be happening at a smaller scale elsewhere too. Certainly, from anecdotal evidence, it would appear that ‘temporary’ use of clients ’holdings happens at a certain scale. Having use of other people’s money is a great temptation.

Obviously, the most important thing at this point would be to resolve this issue carefully and ensure that investors get their money back quickly. Investors participate in the market with the knowledge that no matter what happens to the value, equities is the most liquid of all asset classes, and that there is an elaborate regulatory structure to ensure that. What we are seeing is a tough test for that regulatory structure. As much as recovering the money, equally important is the setting of an example. A crisis is always a great opportunity. Unless this issue is closed with punitive measures that are truly strong enough to put the fear of god into anyone else who might be tempted to do the same, this crisis will be wasted.

(Author is CEO, Value Research)

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views

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