SAT suspends transfer of securities in Karvy case

Swati Deshpande | TNN
Mumbai: The Securities Appellate Tribunal (SAT) on Tuesday suspended the transfer of shares from the DP account of Karvy Stock Broking and directed Sebi’s whole-time director to hear Bajaj Finance’s grievances, which had challenged the regulator’s share-shift order.
Without commenting on the merit of the case filed by Bajaj Finance against a November 22, 2019, Sebi order, SAT has asked the whole-time director to hear the NBFC on the basis of its representation dated November 23, 2019.The SAT order was passed by C K G Nair and Justice M T Patil.
Following the Sebi order, NSDL has so far transferred securities to nearly 83,000 clients from the DP account of Karvy. Bajaj Finance had on Monday approached SAT and challenged the Sebi order that had directed depositories to transfer shares back to the original shareholders’ demat accounts in the wake of the Karvy scandal. The tribunal also directed Sebi to hear Bajaj Finance on any other additional representation which it may like to make. Such additional representation is to be made by December 4, said SAT. Sebi has to pass orders by December 10.
Meanwhile, SAT granted no immediate relief to Karvy Stock Broking against its suspension by the NSE. Though it did not stay the suspension, the tribunal ordered Karvy be heard by the appellate authority at the NSE on the issue and directed that an order be passed by December 6.
Karvy Stock Broking is alleged to have illegally pledged shares to raise money. Bajaj Finance argued that the company had done its due diligence and hence was not at fault at lending against the pledged securities.
“We find that the impugned order (Sebi’s order) notes that Karvy had raised funds pledging securities from banks and NBFCs and, therefore, was aware that rights of those entities would be impacted by the order. As such, even if they could not be heard while passing the impugned order at least on their representation they were entitled to be heard,” SAT said.
“It is also an undisputed fact that lending against securities is a normal and permitted business activity of banks and NBFCs and Sebi is fully aware of the same,” SAT observed. The tribunal observed that the Sebi order has “prejudiced and adversely affected the rights of the appellant (Bajaj Finance) as a bona fide lender”.
Bajaj Finance through its lawyers Janak Dwarkadas had contended lending against pledged securities was normal business for it. There was an undertaking from Karvy Stock Broking that such pledged securities were owned by Karvy itself and were not from clients’ accounts. The order noted that Dwarkadas had also argued that given the increasingly tightened regulatory approach to this issue, Bajaj Finance “had no reason to doubt the pledges made by Karvy for obtaining loans because the standard operating procedure for such accounts and securities was rigorous and monitored by depositories, exchanges and above all Sebi”.
Dwarkadas said Bajaj Finance would be unsecured up to Rs 344 crore due to Sebi’s order. For Sebi, Rafique Dada had argued that “account concerned is not a pool account but a beneficiary client account.” He also said that Bajaj Finance had not done due diligence.