Supreme Court to hear Sebi, NSDL appeal against SAT’s Karvy decision


Market regulator Securities Exchange Board of India (Sebi) and National Securities Depositories Ltd (NSDL) on Wednesday moved the Supreme Court against the Securities Appellate Tribunal’s decision that quashed the market regulator’s orders that restricted lenders, including Axis Bank, HDFC Bank and ICICI Bank, from revoking the shares pledged by Karvy Stock Broking (KSBL).

While quashing the Sebi’s orders of December 13, 2019, and January 14, 2020, the tribunal had on December 20 permitted Axis Bank to invoke the shares pledged in its favour and also directed the market regulator, National Stock Exchange of India, and NSDL to restore the pledges made in favour of the lenders within four weeks or in the alternative, Sebi, the stock exchange and depositories to “compensate” the lenders with the value of the underlined securities pledged in their favour by Karvy with 10% interest per annum.

The total dues payable by Sebi to these lenders, which also include IndusInd Bank and Bajaj Finance, till Thursday amount to around Rs 2300 crore, senior counsel Arvind Datar, appearing for Sebi, told a Bench led by Chief Justice DY Chandrachud.

While the senior counsel sought a stay of the SAT’s December order, the Bench posted the matter for hearing on Thursday.

Stating that SAT’s decision is wholly unsustainable and perverse in law, Sebi in its appeal stated that the securities pledged by stock broker Karvy were contrary to the banking and other depository norms. The issue is whether a stock broker Karvy can unauthorisedly pledge securities of its clients by misusing their power of attorneys to obtain loan facilities from banks/financial institutions who could enforce such pledge against the interest to the detriment of more than one lakh innocent holders of such securities, the appeal filed through counsel Pratap Venugopal questioned.

“SAT ignored that the very creation of pledge on shares owned by fully paid clients of Karvy is contrary to the banking norms and excluding the principle that a pledgee cannot obtain better title than the pledger in its entirety is an invitation to fraud in the securities market at the hands of depository participants, brokers registered intermediaries and complacent financial institutions and hence this principle is so fundamental that it can never be excluded in its entirety although, exceptions may be recognised,” the appeal stated.

In November 2022, Sebi prohibited Karvy from taking new clients as a broker and had also directed the depositories and stock exchanges to initiate disciplinary regulatory proceedings against it on the grounds that the stock broker misused client securities, pledged securities worth over Rs 2,300 crore belonging to 95,000 clients for raising loans of Rs 600 crore from banks and non-bank lenders. It also found that Karvy had not disclosed one of its demat accounts and misused client securities in violation of various SEBI norms. Lenders had then moved the tribunal against Sebi’s order to transfer securities held with Karvy back to the clients.



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