Karvy broking case: SAT directs Sebi, NSE, NSDL to compensate lenders

Sebi, NSE, NSDL directed to compensate lenders for shares transferred with 10% interest

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

In 2019, the Securities Exchange Board of India (Sebi) affirmed the misuse of client securities by Karvy Stock Broking. According to the earlier Sebi order, in response to pleas by banks, the value of clients’ securities pledged by the stockbroker was over Rs 2,300 crore.
 

Sebi had rejected the banks’ plea to invoke these pledged shares. The tribunal has allowed Axis Bank to invoke the pledged shares and directed the market regulator to restore the pledge made in favour of the other banks and pay compensation.
 

“A direction is given to Sebi, National Stock Exchange (NSE), and National Securities Depository (NSDL) to restore the pledge made in favour of the appellants within four weeks from Wednesday. In the alternative, Sebi, NSE, and NSDL are directed to compensate the appellants with the value of the underlying securities pledged in their favour, along with interest at 10 per cent per annum within the same period,” said Justice Tarun Agarwala.
 

An aggregate amount of Rs 80.64 crore, along with interest, was due to Axis Bank from Karvy. Rs 642.25 crore was the outstanding amount to ICICI Bank, Rs 344 crore to Bajaj Finance, Rs 208.5 crore due to HDFC Bank, and Rs 159 crore to IndusInd Bank, according to the Sebi order dated December 13, 2019.
 

As Axis Bank had obtained a stay order from the debts recovery tribunal (Hyderabad) on the transfer of pledged shares, these shares were not encashed and remain intact. In the case of the other banks, NSDL transferred the pledged shares to the clients of Karvy.
 

The tribunal noted that NSDL or Sebi cannot release or transfer a pledged share without the approval from the pledgee, in this case, the banks.
 

“When a third-party right is created, Sebi could not intervene and remove the shares arbitrarily. In our opinion, Sebi has acted arbitrarily in directing NSDL to transfer the ple­dged shares without revoking the pledge,” said the tribunal.
 

SAT noted that if Sebi and the depository opined that the pledge was wrongly created by Karvy, then the appropriate remedy was to file an application before the National Company Law Tribunal 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 (which were fungible) to the clients of Karvy, which action was without any authority of law,” noted the order.

Tribunal’s Directions

• Restore the pledge made in favour of the banks within four weeks
• Compensate the banks with the value of the securities pledged along with 10% interest p.a.
• Transfer of pledged shares done ‘arbitrarily’ by Sebi, NSDL
• Value of clients’ securities pledged by the stock broker was over Rs 2,300 cr