ED provisionally attaches properties worth Rs 1,984 crore of Karvy, others

Hyderabad: The Enforcement Directorate (ED) has provisionally attached immovable and movable properties in the form of lands, buildings and share holdings worth Rs.1,984 crore under Prevention of Money Laundering Act (PMLA)-2002 in the money laundering investigation against Karvy Stock Broking Limited (KSBL) and its Chairman C Parathasarathy and others.

It initiated money laundering investigation on the basis of FIRs filed by the Central Crime Station (CCS) police station, Hyderabad on the complaints of lending banks who complained that the Karvy Group had availed large amounts of loans by illegally pledging their clients’ shares worth about Rs.2,800 crore and the said loans have become NPA after the release of the client’s securities as per the orders of NSE and SEBI, according to a press release.

KSBL was one of the leading stock brokers 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 had not revealed a depository participant (DP) account and credited the funds raised by pledging of client securities to six of its own bank accounts (“Stock Broker-own Account”) instead of the “Stock Broker-Client Account”.

The ED has collected the audit conducted by NSE and the orders passed by SEBI and ROC against KSBL and the forensic audit reports of BDO India LLP. On September 22, 2021, the conducted searches at nine locations and subsequently, Parathasarathy and Karvy Group CFO G Hari Krishna were brought on production warrant and produced before ED PMLA special court and were arrested under PMLA on January 20, 2022.

They are presently in judicial custody. Parathasarathy has been totally evasive and non-cooperative during the investigation and while admitting a few wrong doings by KSBL, has been shifting the entire blame on the CEO, CFO and other senior management.

The release further added that the ED has conducted extensive investigation, recorded the statement of various officials and directors of related entities.

According to ED investigation, KSBL had misused the Power of Attorney given by its clients and misused the same to illegally raise loans.

Shares of clients, who did not owe any funds to KSBL, had been transferred to the margin/pool account of KSBL and were pledged with the banks by making misleading declaration of ownership. Share transfers were done from the client’s accounts for which the KSBL’s sales team claimed that they had taken clients’ approval for stock lending through phone or orally, but there are no supporting documentary evidence.

Subsequently, the loans were diverted from the stated purpose by a set of high ranking functionaries working under the overall control of the CMD from a ‘secretariat section’ which maintained ‘Back Office Control Account’. Funds were diverted to related companies like – KDMSL and KRIL which was set up for real estate ventures, diverted loan funds were routed via multiple defunct NBFCs to KFSL NBFC to wash its bad debts and large chunks of loan proceeds were pumped into shell insurance companies which did massive speculative share trading with KSBL as the stock broker and ostensibly suffered massive losses.

The press release said that a very complex web of financial transactions, using several shell entities and NBFCs, have been executed to conceal the source of these funds with a view to project them as untainted funds. Large amounts of proceeds of crime have been ‘invested’ by infusing in the form of investments/share capital/short term advances/loans to group companies.

This has resulted in enhancement of the value of the subsidiary companies of KSBL. The accused are now trying to sell these subsidiary businesses at a profit to yield indirect windfall gains to the main accused. In order to safeguard the proceeds of crime from alienation, the ED has identified and attached 102 number of landed properties worth Rs 213.69 crore, shareholding of Parathasarathy in KFin Technologies worth Rs.438.70 crore and tangible/intangible assets worth Rs 1,280 crore of KDMSL, KFSL NBFC, KSBL etc., totaling to Rs 1,984 crore, the press release added.

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