The sudden downfall of Amaravati real estate led to Hyderabad-based fincorp Karvy collapse during the trading of finances and sustain a major setback.

Companies that divert and siphon off public funds for investment in realty through shell firms are foredoomed, if one goes by what has happened now to Karvy group of companies and what had resulted in the downfall of once IT major Satyam Computers some years back.

Parallels are being drawn between the collapse of once celebrated Hyderabad-based stock broking firm Karvy group and that of Satyam Computers, also based in Hyderabad, in 2009. In both the cases, the companies had resorted to diversion of funds mainly to invest them heavily in real estate.

The collapse of Hyderabad real estate market as a consequence of the 2008 global economic meltdown eventually resulted in the fall of Byrraju Ramalinga Raju-led Satyam Computers. In the case of Karvy Stock Broking Ltd (KSBL), the main reason is the crash of real estate in Andhra Pradesh’s capital Amaravati.

The Enforcement Directorate (ED) recently got four-day custody of arrested KSBL Chairman and MD C Parthasarathy, and CFO G Hari Krishna, in the over Rs 2,800 crore security scam.

According to informed sources in industry circles, KSBL’s subsidiary, Karvy Realty Private Limited (KRPL), bought huge tracts of land in Amaravati, projected previously as the new capital of Andhra Pradesh, in anticipation of then chief minister N Chandrababu Naidu’s return to power. The whole idea was to make a killing once Naidu retains gaddi.

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However, the regime change in Andhra Pradesh and the subsequent change in the priorities of the new government in Andhra Pradesh upset KSBL’s apple cart, with crash in real estate value in Amaravati leading the collapse.

A SEBI order, issued on November 22, 2019, stated “Prima facie a net amount of Rs.1,096 crore has been transferred by KSBL to its group company i.e. Karvy Realty Private Limited between from 01-April 2016 to 19-October-2019” (sic). All the amount that KRBL routed to its real estate subsidiary has been invested in Amaravati real estate.

ED’s investigation into fund trail also confirmed diversion of funds from KSBL to its real estate arm. Parthasarathy, Krishna Hari were arrested under the Prevention of Money Laundering Act (PMLA), 2002, in a money-laundering case connected with the fraud committed through illegal diversion of clients’ securities by KSBL worth Rs 2,873.82 crore and pledging of these securities with banks/NBFCs for seeking loans and subsequent loan default.

The ED, in a statement said, money laundering investigation was launched based on the FIR filed by HDFC Bank with CCS Hyderabad Police under various sections of IPC for defrauding HDFC Bank.

“Fund trail investigation has shown that the borrowed funds were  transferred to other group companies, particularly to one WoS of KSBL i.e. Karvy Realty (India) Limited (KRIL), and then to 14 shell companies floated by Karvy Group,” said ED.

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ED had recorded the statement of various employees of the Karvy Group, and conducted searches at 9 locations last year in September. The central agency, during its investigations, had found the complex web of transactions designed by the senior management of the Karvy Group to misuse the securities of their clients and to raise loans fraudulently which were then rotated via multiple related companies and diverted from the stated purpose. It is learnt that Karvy Group had promised investors returns of 18-20 pc and collected large sums of money.

On the other hand, going by the revelations till date in the Karvy scam, it is now obvious that major banks and fintech companies that gave massive loans to the company either failed to do due diligence in checking the validity of the documents, shares and collaterals submitted to them; or, worse still, connived with the promoters of the company.

When an individual obtains mortgage loans or pledges shares for loans, banks take possession of the original title deeds, after creating a charge and transferring the property rights to itself in association with the person obtaining the loan, pending clearance of the loan amount. In any case, certified records from the registration department are scrutinized thoroughly before sanction of the loan simply because no person can sell anything that he does not own in the first place.

The investigators have gone after Karvy promoters without looking sufficiently into the questionable role evidently played by the lending banks and fintech firms.

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The moot question is: how can the lenders part with huge sums without establishing that Karvy promoters are indeed owners of the shares pledged or other collaterals submitted. Even for relatively small loans given to individuals banks take possession of the title deeds after establishing the ownership of the property mortgaged, shared pledged and after checking the veracity of all documentation relating to it.

Reports suggest that at least four major lenders viz. Bajaj Finance, ICICI Bank, HDFC Bank and IndusInd Bank had extended Rs 345 crore, Rs 642 crore, Rs 208 crore and Rs159 crore to the broking firm against pledged shares worth Rs2,873 crore as of 16 September 2019. The value of the pledged shares came down to Rs2,319 crore in November 2019.

Observers say investigators would do well to also probe whether the lenders did due diligence while assessing the shared or other securities pledged and establishing their ownership. It is doubtful whether the lenders did due diligence going by the scale of the collaterals (securities that Karvy did not own) submitted. If one goes by the massive amount involved in the scam (over Rs 2,800 crore) it is clear that top officials of the banks and fintech companies connived with Karvy promoters. It is not that only Karvy honchos are to blame in the murky goings-on. #KhabarLive #hydnews