India’s market regulator, the National Stock Exchange, and the National Securities Depository Ltd are facing a financial liability exceeding Rs1,400 crore following a ruling by the Securities Appellate Tribunal in favor of lenders of Karvy Stock Broking Ltd.
The court on Wednesday quashed two orders of the Securities and Exchange Board of India, which dismissed appeals by the lenders seeking restoration in their favor of shares pledged by Karvy.
Sebi, NSE and NSDL may now have to buy shares from the market at their own cost to restore the pledge, legal experts said.
This is a rare case of the regulator and market infrastructure intermediaries facing such huge financial liabilities, said a lawyer on condition of anonymity.
“The impugned order of Sebi is quashed. A direction is given to Sebi, NSE and NSDL to restore the promise made in favor of the appellants (banks) within four weeks from today,” a bench headed by Justice Tarun Agarwala stated.
“Alternatively, Sebi, NSE and NSDL to compensate the appellants with the value of the underlying securities pledged in their favor along with interest at 10% per annum.”
Sebi in November 2022 issued an interim order against Karvy Stock Broking, barring it from taking on new clients as a broker. The market regulator also directed the depositories and exchanges to initiate disciplinary regulatory proceedings against Karvy.
Sebi also prevented lenders from accessing the pledged shares.
Lenders including HDFC Bank, Axis Bank, ICICI Bank, IndusInd Bank and Bajaj Finance have appealed against Sebi’s order to transfer securities held with Karvy Stock back to the customers.
Sebi said that Karvy misused customer securities, and pledged them for loans against shares of banks and non-bank lenders. It also said Karvy failed to disclose one of its demat accounts.
Basically, Karvy took loans from ₹600 crore by pledging securities at premium ₹2,300 crore belonging to 95,000 customers. As per the Sebi rules, brokers have to keep client accounts and broker accounts separate.
On Wednesday, the Securities Appellate Tribunal said that not allowing the lenders to revoke the pledge under the Depository Act and to dispose of the pledged shares without the consent of the lenders was “completely illegal and without any law” on the part of NSE and NSDL.
“The shares disposed of and transferred by NSDL under the instructions of Sebi can be restituted,” the appellate court said.
The primary complaint of the lenders was that Sebi, NSE and NSDL voluntarily de-pledged the shares, making them unsecured creditors of the earlier secured status.
The banks and NBFCs said the pledge was created under the Depository Act and the Depository and Participant (DP) regulations. They claimed that they had the right to exercise the pledge over the encumbered securities and that Sebi, NSE and NSDL were wrong in returning the securities to the accounts of Karvy’s customers.
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Published: 20 Dec 2023, 20:17 IST
(tagsTo Translate)Karvy Stock Broking