EY's forensic audit on Karvy to focus on fund diversion of Rs 1,100 cr

The alleged fund diversion worth Rs 1,100 crore by Karvy Stock Broking to its real estate arm in the past three years and the reasons for deterioration in the financial metrics of the group companies will be the focus of the forensic audit to be conducted by EY.

Karvy Realty India, which allegedly received the funds from its parent, is a real estate brokerage firm, and also on-lends to other subsidiaries of the group.

“There is absolutely zero information on how the funds were used by Karvy Realty and what the promoters did with such a huge sum of money,” said a source in the know.

The company stopped giving financial information on the group companies, leading to multiple downgrades by rating firm ICRA in November.

EY will be investigating the end use of the funds as well as the funds trail between Karvy Stock Broking and Karvy Realty. The realty firm, in turn, allegedly transferred the funds to several other companies. The liquidity crisis in the real estate industry may have hit Karvy Realty hard.

Last week, the Securities and Exchange Board of India (Sebi) barred Karvy Stock Broking from taking on new clients over the alleged misuse of clients’ securities. In its order, Sebi said that prima facie, a net amount of Rs 1,096 crore was transferred by Karvy Stock Broking to Karvy Realty between April 2016 and October 2019.

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In a statement, Karvy said it made investments in subsidiary companies through Karvy Realty. “We are of the firm belief that the investments made through own funds of the group and borrowings other than the pledge of securities were fully compliant with the relevant provisions and directives of the regulator during the period that they were made,” it said. Registrar of Companies records, however, show Karvy Realty has not submitted its financial details since March 2018.

The last financial information provided to ICRA shows that Karvy Stock Broking was fast losing money. The company reported a profit after tax (PAT) of Rs 7.56 crore in the first half of 2018-19, compared to Rs 20.26 crore in PAT in March 2018. The primary reason for the reduction in profitability was the increase in operating expenses and higher finance costs. The profitability indicators are lower than peer brokers of a similar size.

The company was also low on cash. As of January 31, 2019, Karvy Stock Broking had a cash and liquid assets balance of Rs 213 crore, while debt repayment till March 31, 2019 was Rs 266 crore. Its consolidated debt was Rs 2,900 crore, with ICICI Bank, HDFC Bank and Lakshmi Vilas Bank having the highest exposure among Indian lenders.