In my opinion, Bajaj Finance (or any NBFC) as a lender neither has access to the transaction details of Karvy (or any DP/borrower for that matter) nor they are supposed to check that.
In case of LAS, what a lender broadly checks is that the amount of loan matches with the financial profile of the client, his repaying capacity, CIBIL records, the quality of shares offered for pledging and appropriate hair cut on those shares.
To comply with AML (anti money laundering) guidelines, a lender is suppose to ensure that the securities are being pledged from borrower’s own account and funds are transferred to borrowers bank account only. Also at the time of closure of the loan, the funds are taken from the account in which loan was disbursed.
Bajaj Finance has followed processes as laid by Regulatory Authorities (SEBI) and Depository Participants (NSDL & CDSL) and is at no fault at all.
Karvy misused the POA given to it by the clients and transferred shares which, as a custodian, it was suppose to keep in client’s account. A DP cannot retain/transfer shares from client’s account unless there is a debit balance in client’s account. Even in case of debit, the process to recover due amount is altogether different. In no scenario, a DP can pledge shares of client without taking written consent from the client. So this is a clear breach on part of Karvy.
There is a bigger lapse on the part of clients. There are few things that a client must ensure while opening an account with broker/DP which are as follows.
- While opening an account, client must ensure that all the details filled in account opening form including address, mobile number etc are correct and belongs to him only.
- He should go through the terms & conditions given in POA and object in case there is any clause which isn’t looking good on the face of it. Like POA shouldn’t give right to Broker/DP to retain funds/shares in case there is not debit / outstanding in client’s account.
- NSE/BSE sends SMS for the amount of trade done by the client on any given day. He should make sure that he is receiving such messages and the amount of trade as given in such message matches with whatever trading he has done during that day.
- In the same manner, Depositories (NSDL & CDSL) sends message wherever any share is getting transferred from client’s account. If a client receives a message for debit of share from his account WHICH HE HAS NOT SOLD the previous day, this is a red flag and requires further checking. He can check with his DP and ask for the reason for debiting those shares.
- LAST BUT THE MOST IMPORTANT STEP - Depositories (NSDL & CDSL) provides an interface (Speed-E, IDeAS in case of NSDL and Easi & Easiest by CDSL) which is for clients and free of cost, wherein by registering themselves, clients can check their holding and reconcile it with what his Depository Participant (ICICI, Zerodha, Karvy, HDFC or any other DP) is showing in client’s account. Client should reconcile statement of Depository and DP at least once every month.
For details on how to register with Depository’s client interface, the process is simple and self explanatory. People having their DP account with NSDL can register themselves at www.eservices.nsdl.com and for CDSL clients www.web.cdslindia.com/myeasi/home/login. Read about the two services provided by depositories and choose the one that suits your requirement.
Disc – No investments in BFL.