SAT quashes SEBI orders in Karvy‌ stock broking case

The Securities Appellate Tribunal (SAT) on Wednesday quashed two separate orders by the Securities and Exchange Board of India (SEBI) against Axis Bank, HDFC Bank, ICICI Bank, IndusInd Bank and Bajaj Finance, restricting them from revoking the shares pledged by Karvy Stock Broking.

Axis Bank has been permitted to invoke the shares pledged in its favour. The tribunal directed the SEBI, NSE and NSDL to restore the pledge made in favour of the appellants within four weeks. In the alternative, SEBI, NSE and NSDL have to compensate these lenders with the value of the underlined securities pledged in their favour by Karvy Stock Broking along with interest at 10 per cent per annum.

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The total dues payable to these lenders amount to over ₹1,433 crore, based on the calculations of the earlier 2019 order.

Right to evoke pledge

The SAT observed that once a pledge is validly created by a broker in favour of the appellants (the five lenders in this case), and they are recorded as beneficial owners, they become the registered owner under Section 10. Consequently, if a default is committed by the broker, the appellant gets a right to invoke the pledge under the agreement.

“Once a valid pledge is created in favour of a third party then a third-party right is created in the attached property and the same cannot be sold or distributed to discharge the liabilities of the broker,” SAT said in its 71-page order on Wednesday.

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If a transfer of the securities was in contravention to the SCRA or SEBI Act, then the depository has a right to undo the contravention and rectify its register of records by moving an application before the NCLT, the tribunal said.

“If SEBI/NSE/NSDL were of the opinion that the pledge was wrongly created by Karvy... the appropriate remedy was to file an application before the NCLT for rectification of its register. This process was not done and like a highway robber NSDL, through illegal directions from SEBI, transferred the pledged shares to the clients of Karvy,” SAT observed.

‘No due diligence’

SAT said that SEBI’s finding that there was lack of due diligence on the part of the appellants during the creation of the pledge and they were not entitled to invoke the invalid pledge, is patently erroneous.

The appeals filed by the five appellants are against the SEBI order dated December 13, 2019. These five lenders had advanced loans to Karvy against securities pledged by the broker. Since Karvy defaulted they wanted to invoke the pledge but prior to that SEBI had passed an ex parte ad interim order dated September 22, 2019, directing the depositories not to allow the transfer of securities from a particular DP account. These appellants filed appeals before the tribunal seeking relief to invoke the pledge pursuant to the default committed by Karvy.

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