Banks move SAT against NSDL's decision to transfer Karvy's securities

Private lenders HDFC Bank, ICICI Bank and IndusInd Bank on Tuesday approached the Securities Appellate Tribunal (SAT) against National Securities Depository’s (NSDL) move to transfer securities from Karvy Stock Broking’s demat account to its respective clients. A day earlier, Bajaj Finance had moved the tribunal in the same matter. 

These lenders have cumulatively lent close to Rs 1,000 crore to Karvy, which has fraudulently used its client securities as collateral for the loans.

HDFC Bank had Rs 470 crore worth of shares pledged for Rs 300 crore of outstanding loans. Bajaj Finance has Rs 345 crore of outstanding loans to Karvy. Other lenders’ exposures couldn’t be ascertained.  

Lawyers arguing on behalf of the lenders questioned NSDL’s decision to reverse the pledged shares back to clients, stating that the Securities and Exchange Board of India’s (Sebi) interim order on November 22 was aimed at keeping status quo. 

The counsel appearing for HDFC Bank argued that the SAT must immediately intervene to freeze the transaction of shares held in client accounts. 

“Around Rs 400 crore of pledge has been wiped out,” said Gaurav Joshi, the counsel for HDFC Bank. 

Further, lawyers stated that the move to transfer shares back to client accounts was in violation of Sebi’s Depositories Act.

“Such a transaction cannot be concluded without concurrence of the pledgee,” said one of the lawyers. Senior counsel 

Somasekhar Sundaresan, appearing on behalf of NSDL, said the depository’s move was done in-line with Sebi's order. Further, the depository’s move was after due consultation with Sebi. 

“The shares have been reversed back to clients who don’t have their outstanding dues in full, as per the stated norms,” he said. 

He pointed out that in NSDL’s records, the Karvy Stock Broking account was marked as “non-house”, which indicated that this was not the broker’s own account. “So, banks should have been aware that this was a client’s account,” he said.

Further, he argued that Sebi’s June circular had already directed brokers to unpledge all client securities. This should have served as notice to lenders exposed to Karvy and the former should have appropriately questioned the broker on the quality of the underlying collateral, he argued.

The lawyer also questioned the lending practice of banks and claimed that they didn’t follow the due diligence, as mandated by the Reserve Bank of India (RBI), when lending against securities. 

Lawyers representing the banks argued that the lenders had operated well within the RBI’s framework when lending against shares to Karvy. Also, according to the account name in the banks’ records, the Karvy account appeared to be its own, they said. 

The lawyers proposed that the SAT either restore status quo in line with Sebi’s November 22 order, freeze transaction of shares now in client accounts, or reverse the securities transferred to the clients back in the pledged account. 

This will help in protecting the security under dispute, while the matter is being heard and forensic audit is pending, they said.

SAT’s Bench, comprising CKG Nair and M T Joshi, reserved the order for Wednesday. The tribunal, however, issued an order in case of Bajaj Finance, where similar arguments and counter arguments took place a day earlier.

SAT directed Sebi’s whole-time members to give a personal hearing to Bajaj Finance and pass a final order by December 10. In its order, SAT observed that the Sebi order had adversely affected the rights of Bajaj Finance. 

It ordered a stay on transfer of further securities from Karvy’s demat accounts to clients. However, the lawyers seek wider relief instead of just getting a hearing from Sebi. 

Karvy moves SAT

Karvy filed another plea before the SAT against the NSE’s decision to suspend its broking licence. 

Vikram Nankani, appearing on behalf of Karvy, questioned the scope of the bourse to suspend membership of the brokerage, when Sebi’s own interim order on November 22 didn’t give any such explicit direction.

The counsel argued that suspension of Karvy’s membership was in detriment to its existing clients.  

Disposing off the matter, the tribunal directed Karvy to approach the NSE’s disciplinary committee.