Karvy scam | SEBI likely to seek RBI probe into role of banks, NBFCs

The Securities and Exchange Board of India (SEBI) may write to the Reserve Bank of India (RBI), which regulates banks and non-banking financial companies (NBFC), seeking a probe against lenders that lent to Karvy Stock Broking without due diligence. An industry source told Moneycontrol that the loans given to Karvy -- some of which were extended after the firm illegally kept client securities as collateral -- should have triggered red flags in the system. These warning signs include the fact that the loan amounts were abnormally low (versus the collateral pledged) as well as Karvy’s own financial situation. A second source said that lenders had given Karvy Rs 1,2000000000 against promoter assets said to be worth Rs 5,0000000000. Karvy also borrowed another Rs 6000000000 by pledging client securities worth Rs 2,3000000000. Bankers reserved the client securities as cover for Karvy’s entire loan amount, meaning a single default could result in the securities being sold. The source added that the low loan-to-value ratio, as well as the fact that Karvy only had securities worth only Rs 2700000 on its own balance sheet, should have raised eyebrows. Such instances point to clear wrongdoing by banks and NBFCs, the source added. ICICI Bank, IndusInd Bank, HDFC Bank, Axis Bank, Kotak Mahindra Bank and Bajaj Finance had granted loans to Karvy on the pledged client securities. Their total exposure stands at more than Rs 1,8000000000. The Karvy case came to light after SEBI, in June, passed a circular requiring brokers to segregate their own and client accounts. On December 2, SEBI ordered NSDL to transfer the pledged securities belonging to clients back to their accounts. Securities worth around Rs 2,0000000000 were returned and nearly 83,000 of affected 90,000 clients got back their securities in full. Prior to passing the order, SEBI had also met bankers to convey its view that the securities belong to the clients. “When Karvy does not have any right to those securities, how can banks and NBFCs make a claim on them," officials at SEBI are believed to have told the bankers. But on December 3, a clutch of lenders – claiming right to the securities -- challenged SEBI’s decision in the Securities and Appellate Tribunal, which directed NSDL to halt any further securities to clients. (The SAT further asked SEBI to hear out the banks again and pass a fresh order again on December 16.) SEBI is also planning further action, and may file a case with the Economic Offences Wing of the Mumbai police. “The Karvy case is not about securities law alone. It is mainly a civil case where SAT has no power to pass an order. SEBI may now move the EOW to file a case against Karvy for stealing clients’ securities," a source said. The regulator, worried that the practice of pledging client securities may not be a solitary case, also sought information from depositories on banks’ lending to brokers against securities. It, however, learnt that only four brokers have exposure of more than Rs 500000000 against pledged securities, and all the securities are their own.