The Law Enforcement (ED) Directorate said on Wednesday that it had seized immovable and movable property in the form of land, buildings and shareholdings worth Rs 1,984 crore belonging to Karvy Stock Broking and its chairman C Parathasarathy and others in a money laundering case.
The ED initiated a money laundering investigation based on FIRs filed by CCS Police Station, Hyderabad Police, based on complaints from lending banks.
Banks had complained that Karvy Group used large amounts of loans by illegally pledging their clients’ shares worth around Rs 2,800 crore and said loans became non-performing assets (NPA) after the release of client securities in accordance with the orders of the National Stock Exchange (NSE) and the market regulator Securities and Exchange Board of India (SEBI).
Karvy Stock Broking Limited (KSBL) was one of the leading stockbrokers in the country with millions of clients.
The scam came to light after a limited-purpose inspection of KSBL conducted by NSE in 2019 revealed that KSBL failed to disclose a DP account and credited the funds raised by pledging securities from clients on 6 of its own. bank accounts (“Stock Broker-own Account”) instead of the “Broker-Client Account”.
“In order to protect the proceeds of crime from alienation, ED has identified and attached 102 land holdings worth Rs 213.69 crore, C Parathasarathy’s stake in M/s KFin Technologies worth Rs 438 .70 crore and tangible/intangible assets worth Rs 1280 crore of M/s KDMSL, M/s KFSL NBFC, M/s KSBL, etc. totaling Rs 1984 crore,” the ED said in a statement. .
“Further investigation is ongoing,” the ED said.
On September 22, 2021, the ED carried out searches in 9 locations and subsequently, C Parathasarathy, CMD of Karvy Group, and G Hari Krishna, CFO, were brought under production warrant and brought before the special court of the ‘ed PMLA and were arrested under the Prevention of Money Laundering Act (PMLA) on January 20, 2022. They are currently in police custody.
“C Parathasarathy was completely evasive and uncooperative during the investigation and, while admitting some wrongdoing on the part of KSBL, placed all blame on the CEO, CFO and other senior staff,” ED said in a statement.
According to ED’s investigation, KSBL misused the power of attorney given by its customers and misused it to illegally contract loans. The shares of the clients who owed no funds to KSBL had been transferred to KSBL’s margin/pool account and pledged to the banks making a misrepresentation of ownership.
Stock transfers were made from client accounts for which the KSBL sales team claimed to have obtained client approval for stock lending over the phone or verbally, but there is no evidence supporting documentary. Subsequently, the loans were diverted from their stated purpose by a set of senior officials working under the overall control of the CMD from a “secretariat section” which maintained a “back-office control account”.
Funds were diverted to related companies such as – KDMSL, KRIL which was set up for real estate businesses, the diverted loan funds were channeled through several former NBFCs to KFSL NBFC to wash off its bad debts and large chunks of the proceeds loans were injected into insurance companies Shell which made massive speculative trades in shares with KSBL as a stockbroker and apparently suffered massive losses.
A highly complex network of financial transactions, using multiple fictitious entities and NBFCs, was executed to disguise the source of these funds in order to project them as uncontaminated funds.
Large amounts of proceeds of crime were “invested” in the form of investments/share capital/advances/short term loans to group companies. This resulted in an increase in the value of KSBL’s subsidiaries.
Now, the defendants are trying to sell those subsidiaries for a profit to yield collateral gains to the main defendant, the ED said.