The Law Enforcement (ED) Directorate announced on Thursday that it has arrested Karvy Stock Broking Limited (KSBL) CMD C Parthasarathy and Group Finance Director G Krishna Hari in connection with a related money laundering investigation to an alleged misappropriation of client securities of over Rs 2,873 crore.
The agency produced the two – already being held in Bengaluru Central Jail after being arrested by police – before a special Prevention of Money Laundering Act (PMLA) court in Hyderabad on January 20 and 25 January, he sent them back to four days of custody in the emergency room from January 27 to 30, he said in a statement.
The ED case, filed under the criminal provisions of the PMLA, is based on several Telangana Police FIRs filed by HDFC Bank, with few other banks and investors alleging that customer securities were unlawfully misappropriated by Karvy Stock Broking Ltd and these were then pledged to banks and Non-Banking Financial Companies (NBFCs) for the loans which were then ‘defaulted’.
The ED previously recorded statements from various employees of the Karvy Group and also investigated the case in September last year.
“The ED uncovered the complex web of transactions engineered by Karvy Group’s senior management to misuse their clients’ securities and fraudulently raise loans which were then routed through several related companies and diverted from the stated purpose.
“Shares of clients who owed no funds to KSBL were also transferred to KSBL’s margin/pool account and pledged to banks/NBFCs,” the agency said.
The power of attorney (POA) given by customers to KSBL to facilitate exchange settlements has been “grossly misused” by KSBL under the instructions of the CMD and senior management.
He said CMD Parthasarathy and Chief Financial Officer (CFO) Hari were the “main conspirators” giving instructions to others.
“Investigation of the fund trails showed that the borrowed funds were transferred to other group companies, in particular to a wholly owned subsidiary of KSBL Karvy Realty (India) Limited (KRIL), and then to 14 companies fictitious launched by Karvy Group.
“They were further misled by the layering done through a complex web of transactions from multiple group company accounts without any financial justification,” he said.
He said various financial consultants and former NBFCs were used to channel the funds.
“KSBL has been found to have benefited from loans from NBFC amounting to Rs 400 crore on behalf of five of these shell companies by pledging KSBL client shares after illegally transferring these shares to their account.
“The fraudulently used loans were used to repay pending loans from related companies, make massive stock trades that would have turned into complete losses and were diverted to personally owned family businesses,” he said.
The agency last year froze shares worth Rs 700 crore of Parthasarathy as it said it was investigating the money trail to trace ‘proceeds of crime which are close to around Rs 2,000 crore”.
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