The Karvy Scam Fallout – How Safe Are Your Mutual Funds

In the wake of the Karvy stock broking fraud, many eyebrows have been raised about the safety of mutual funds. Can your stock broker liquidate your mutual fund units and elope with the money ? What happened at Karvy? Is investing in mutual funds safe? Let’s find out.

Table of Contents

• About Karvy Broking Firm
• How Did Karvy Broking Firm Scam Its Customers
• Are My Mutual Funds With Karvy Safe Then?
• How to Ensure the Safety of Your Mutual Funds
• Conclusion

About Karvy Broking Firm

Karvy broking firm is a stock broking company in India. It has a base of 12 Lakh customers. Clients can buy or sell stock using dematerialized and broking accounts they have with Karvy. Karvy does the selling of the shares in the stock market on behalf of its clients via the power of attorney conferred to it by its customers.

How Did Karvy Broking Firm Scam Its Customers

Generally, there is a pool account of the broker or broking firm to which all the shares come and then are immediately disbursed to client accounts, usually within two to three days. What Karvy did is that it held the shares in the pool account, which was wrong, and proceeded to create its own account without the permission of SEBI, and transferred all shares to its account. With the shares as collateral, it secured loans against them from different financial institutions. It even went to the extent of stating that the pledged securities were its own and not of its clients. Thus, Karvy misused the funds by pledging the shares without informing its clients.

Karvy Broking Firm misused the power of attorney given to it by its customers to carry out the illegal transactions. In general, the broker gets the power of attorney from his customers to trade the shares in the stock market. So, when transactions take place in the stock market, the funds first come into the pool account of the broker which as the name suggests holds the money and shares of all the customers like in a pool.

Brokers are meant to immediately transfer the shares from the pool account to their client’s dematerialized accounts. Not only did Karvy hold the shares in the pool account without informing anyone, but also siphoned out the shares to its own account. Karvy’s underhanded tactics came to light during an audit done by the NSE. This was immediately reported to the SEBI, which has barred Karvy from taking new clients.

Are My Mutual Funds With Karvy Safe Then?

Your mutual funds are safe as they are not affected by the fraud committed by Karvy. Note that Karvy broking firm and Karvy FinTech are totally different entities and must not be confused with each other.
There is a general misconception that Karvy is a single entity that is involved in the fraud. It is Karvy broking firm that did the fraud and not Karvy FinTech which is an RTA (Registrar and Transfer Agent) doing back-office work and statement issuing to its customers on behalf of mutual fund houses.

Karvy FinTech has disassociated itself from the Karvy group in the wake of the scam and has been renamed KFin Tech.

Just because, Karvy is the registrar for your mutual fund investments, you need not get worried. This scam has no relevance to the registry services.

How to Ensure the Safety of Your Mutual Funds

When you buy mutual funds you can choose getting them in dematerialized form or as a statement of account. Both forms are digitized but the dematerialized format carries more risk as more entities are involved in dealing and disbursal of funds.

You should check the following points to ensure the safety of your funds:

• Ensure that your payouts for your funds are received within 1 working day of the payout date.
• Do not keep securities idle and dormant. Keep tab of them as frequently as possible.
• Exercise caution when lending the power of attorney to your broker. As per the latest SEBI rules, it is not mandatory to give the power of attorney to your broker.
• Keep updating your dematerialized account passwords regularly.
• If you sense something might be wrong, immediately inform the stockbroker and authorities so that quick action can be taken to ensure the safety of your mutual funds.
• Remember to keep your contact details like email address and phone number up to date.
• Keep track of SMSes, email newsletters and monthly statements sent by the broker or broking firm.

As dematerialized accounts become more and more common, each investor needs to be cautious about the cyber-threats as well as any frauds that might happen. Though there is no foolproof solution to this, regularly updating your system, cross-checking your account details with NSDL or CDSL online or via their mobile apps, and being generally aware of the technicalities of stock market trading will help you in the long run.

Conclusion

Karvy’s misdeed is an exception. Though technically any stockbroker can use the power of attorney to misuse your funds, he probably won’t do it unless he wants to scam you, which is a very remote possibility due to accountability and legal concerns on part of the broker.