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Karvy Case: SAT Reserves Order On Axis Bank’s Challenge To NSDL, SEBI

The Securities Appellate Tribunal will pronounce its order on Karvy Stock Broking Case on Dec. 17.

Brokers watch their screens during trading hours inside a dealing room at a bank in Mumbai, India. (Photographer: Abhijit Bhatlekar/Bloomberg News)
Brokers watch their screens during trading hours inside a dealing room at a bank in Mumbai, India. (Photographer: Abhijit Bhatlekar/Bloomberg News)

The Securities Appellate Tribunal reserved its order on a plea by private lender Axis Bank Ltd. challenging National Securities Depository Ltd.’s move to freeze and keep in abeyance the shares pledged by Karvy Stock Broking.

The brokerage had pledged shares to the lender as a security against an overdraft facility worth Rs 100 crore. But Axis Bank can’t exercise security interest over the shares to recover its outstanding dues till the abeyance is removed.

The bank also added the Securities and Exchange Board of India, Central Depository Services Ltd. and National Stock Exchange as parties to the case.

This stems from the market regulator’s Nov. 22 order barring Karvy Stock Broking from taking on new clients after investigations indicated the brokerage had unauthorisedly pledged client securities to raise funds that it put to private use. SEBI also restrained transfer of securities from Karvy’s depository participation account with immediate effect, barring those beneficial owners who had made full payments for securities.

Axis Bank, however, contended that the market regulator’s order doesn’t apply in its case as the shares pledged by Karvy are held in a different depository participant account, which is not covered under the order.

Earlier this month, banks and financial institutions moved the Securities Appellate Tribunal to secure the pledged shares. But the appellate tribunal refused any interim relief and directed them to approach the market regulator. SEBI is yet to pass an order.

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Axis Bank’s Plea

Axis Bank had lent Rs 100 crore under an “overdraft against shares” facility to Karvy in April, of which Rs 80 crore was due for repayment in December. As a security, the brokerage had pledged shares held in its demat account.

But on Nov. 22, the market regulator restrained transfer of securities from Karvy’s demat account. Thus, NSDL informed the bank that pledged securities would be kept in abeyance and the lender wouldn’t be allowed to invoke the pledge.

Axis Bank sought the appellate tribunal’s directions to:

  • Quash and set aside NSDL’s move to keep the shares in abeyance on grounds that it is contrary to the applicable law and hence illegal.
  • Restrain NSDL, SEBI and CDSL from taking any action that will prevent the bank from exercising its pledge over the shares.
  • Grant an interim stay on implementation of SEBI’s Nov. 22 order.
  • Order the parties to maintain a status quo and prevent transfer of pledged shares.

Axis Bank’s Arguments

Gaurav Joshi, counsel for Axis Bank, argued that…

  • NSE and NSDL took just nine days to determine whether the securities were fully pledged. That led to the removal and unpledging of shares, rendering the bank as an unsecured creditor.
  • Karvy failed to comply with SEBI’s circular relating to the pledging of shares. NSE and NSDL failed to monitor the brokerage despite the law requiring them to do so.
  • The market regulator’s circular postulates that a pledgee can sell shares pledged to him on account of a pledger’s default. Therefore, SAT must, at minimum, allow Axis Bank to secure unpaid amounts due from beneficiaries to Karvy.
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SEBI’s Defence

Rafique Dada, counsel for SEBI, argued that…

  • Banks were aware about a SEBI circular that mandated all brokers to unpledge shares before Sept. 30.
  • SEBI can’t ignore the interest of numerous market investors. The order passed by it was in nature of a protective order and hence, Axis Bank must approach Karvy and seek a recourse.

What Karvy Said

The counsel representing Karvy informed the appellate tribunal that the brokerage’s proposal to offer shares of its unlisted subsidiary as an alternative pledge for the loans was rejected by the banks.

SAT will pronounce its order on Dec. 17.