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What to do if you are among the victims of Karvy Broking mess

Karvy Stock Broking allegedly pledged its clients shares to fund its real estate arm.

, ETMarkets.com|
Updated: Dec 02, 2019, 05.25 PM IST
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The lingering question is where should an investor go?
With the suspension of troubled broker Karvy Stock Broking by NSE and BSE, its clients will no longer be able to trade on the exchange. As investors are moving rocks to pillars to find out what to do, there is only one way for them to migrate to another broker.

But, in an industry that is built on trust, the lingering question is where should an investor go?

Jaideep Hansraj, Managing Director & CEO, Kotak Securities said the mess at Karvy has left investors’ confidence shaken. “Investors must choose carefully whom they want to do business with. One must not open an account with anyone just because the office is close to home, or simply of a friend’s recommended, or if it has a fancy website. The critical question to ask is – can I trust the institution and the people behind it? It is, after all, your hard-earned money,” said Hansraj.

Karvy Creative (3)

Karvy Stock Broking allegedly pledged its clients shares to fund its real estate arm. Sebi banned the broker for client defaults worth Rs 2,000 crore. It has been banned from taking on new clients and executing trades for existing customers.

Jimeet Modi, sounder of Samco Securities, says the first step out of this mess for investors to open a new account with a broker of her choice. “Take a CMR (client master report) copy of your account with Karvy and move that stock from Karvy to the new platform.”

Investors who have positions in the F&O segment should square off their positions within the existing account and create fresh positions with the new broker, Modi said.

Some investors are also fearing similar episodes in more brokers.

Ghanisht Nagpal, Convener of Delhi Investors Association, said Sebi has become aggressive in all compliances and is busy plugging the loopholes. “More smaller brokers may face similar situations. Nobody knows who else was doing such things.”

Nagpal said in the case of larger discount brokers, their business models necessitated that they do not do these things. “Smaller brokers with higher cost per client had to raise money through such arrangements,” he said.

India’s stockbroking industry is a mix of long-serving smaller players, start-ups, and some large banking trusted companies. But with tightening rules, the life of small brokers may become difficult going ahead. Earlier, many firms used power of attorney on shares to augment their margin funding capabilities. They will have to scale down their businesses, making it unviable for many.

“One thing is very clear that over time stockbroking has become a business of scale. The cost of compliance has been going up for the past few years and will continue to go up. Smaller brokers, which have no capital or are dealing with a handful of clients, may find it increasingly difficult to cover the rising cost of compliance. Like all other businesses, there is going to be consolidation,” said Modi of Samco Securities.

“The cost of running the business will go up after these regulatory steps, which will increase the net worth requirement for brokers,” ET quoted Nithin Kamath, founder of online broker Zerodha.

“Many small brokers who ran businesses solely on such models are facing an existential crisis and will have to look at the possibility of consolidation,” he said.
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