Karvy case: Tribunal quashes SEBI order on shares pledged

Hyderabad: The Securities Appellate Tribunal on Wednesday quashed SEBI orders in the Karvy case. The appellant Axis Bank is permitted to invoke the shares pledged in its favour as per the provisions of the Depositories Act. A direction is given to SEBI, National Stock Exchange (NSE) and National Securities Depository Ltd (NSDL) to restore the pledge which was made in favour of the appellants within four weeks. In the order, SEBI, NSE and NSDL were directed to compensate appellants with the value of the underlined securities pledged in their favour along with interest at the rate of 10% per annum within the same period. Appeals were made by ICICI Bank, HDFC Bank, IndusInd Bank and Bajaj Finance, being the lenders to Karvy Stock Broking Ltd (KSBL) apart from Axis Bank, against the action of SEBI, NSDL, Central Depository Servives Ltd and the NSE. Karvy took multiple banking facilities which also included loan against shares and it was widely reported that SEBI had termed pledge of clients’ shares ‘illegal and invalid’ and therefore, the shares so pledged to the banks did not constitute an appropriate security.The background of the case is that in the course of its business, Axis Bank has been extending overdraft facilities against shares to Karvy from time to time. This OD facility was pursuant to an agreement under which a total sum of 100 crore had been disbursed. As on December 7, 2019, 80 crore along with interest was due from Karvy. The OD facility was secured by shares pledged by Karvy from its demat account named as ‘KSBL – client account – NSE-CM.’ The shares pledged under OD facility agreement were of such clients of Karvy who had debit balance with Karvy as their stock broker. According to Axis Bank, the pledge was in compliance with SEBI circulars.While all this was going on, SEBI through its whole-time member (WTM) issued an ex parte ad interim order (dated November 22, 2019) against Karvy alleging that it had misused its clients securities. Karvy credited the funds raised by pledging clients’ securities to six of its own bank accounts instead of crediting it in the stock broker–client account and also did not report the six bank accounts to the NSE.WTM prima facie found that the securities lying in the DP Account actually belonged to the clients who are legitimate owners of the pledged securities. WTM issued the direction that KSBL was prohibited from taking new clients in respect of its stock broking activities. The order said: “NSDL and CDSL, in order to prevent further misuse of clients’ securities by KSBL, are hereby directed not to act upon any instruction given by KSBL in pursuance of power of attorney given to KSBL by its clients, with immediate effect.”