Karvy: Clients of commodity arm knock on bourses' doors over payment delay

The Karvy Stock Broking fiasco has spilled over to the commodities space, with clients of sister concern Karvy Comtrade facing payment-related issues. People in the know said banks, which had lent money against pledged shares to Karvy Stock Broking, have stopped “withdrawal” by Karvy Comtrade clients, resulting in delay of pay-outs. 

They added that majority of the clients, who actively trade through Karvy Comtrade, have approached the Multi Commodity Exchange (MCX), National Commodity & Derivatives Exchange (NCDX) and Indian Commodity Exchange (ICEX), seeking intervention. 

The exchanges are said to be working with the markets regulator to ensure that investors’ interest are safeguarded. 

Karvy group’s commodity broking arm, too, is facing a liquidity crisis because of some issues related to NCDEX, said people in the know. 

Lenders are in a dispute with Karvy pertaining to loans availed by the latter by fraudulently pledging client securities. The banks have been caught off-guard after the Securities and Exchange Board of India (Sebi)’s move to transfer pledged securities of 83,000 clients from Karvy’s account to their respective clients’ accounts. Lenders, who had given loans against these securities, have challenged the move. 

Although banks seem to have frozen the accounts of Karvy Comtrade, it is not clear if they have put on hold credit facilities against the broking or commodity businesses. 

Trouble mounts
  • Karvy Comtrade, a subsidiary of Karvy group, runs as a separate entity
  • Active on MCX, NCDEX, and ICEX with 6,000-8,000 customers a year 
  • Sebi's Nov 22 order is against Karvy Stock Broking, with no impact on commodity biz
  • Regulator keeping close watch on all business associated with Karvy group
  • Lenders' move comes amid Sebi's transfer of securities to 83,000 investors
Industry players say the move is an extreme step, given both businesses are separate entities. 

“If the action taken by lenders is on account of liabilities of Karvy Comtrade, then the move could be justified. However, they can’t go after commodity clients for wrongdoings of the stock broking arm,” said a legal expert.

Karvy Comtrade have been facing cash flow-related issues since October. The commodity firm attributed the same to long castor futures, which had defaulted in margin obligations leading to a crash in prices by over 20 per cent. 

However, the clearing corporation has recovered money from some defaulting members. The firm is said to be in the process of recovering further dues from clients who had failed in mark-to-market obligations. It serves 200-300 clients. Initially, close to 30 were affected, but now the numbers are increasing, said one of people cited above. People in the know also said banks were reviewing all such pledges, especially those with stock broking entities. They are looking at the concept of bank guarantee facility available with stock brokers. 

Brokers basically use bank guarantees to initiate positions or take additional exposure on behalf of their clients. To protect the bank’s credit exposure to the highly volatile commodities space, the Reserve Bank of India had directed banks to obtain from brokers a minimum margin, 50 per cent of which would be in cash, while issuing guarantees on behalf of them to exchanges such as NCDEX, MCX and NMCE. 

Experts say this review of the business model by lenders has come in the wake of the Karvy fiasco, in which banks doubt that securities pledged with them are clients’ securities, in contravention of Sebi’s June 20 circular. 

The cancellation of pledge or collateral by the regulator will have a significant consequence, which could bring the whole system of ‘loans against shares’ to a standstill, say industry players.


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