SC stays SAT order in shares pledged by Karvy Stock Broking to lenders

In an interim relief to the market regulator, the Supreme Court on Thursday stayed an order by the Securities Appellate Tribunal (SAT) which allowed lenders to revoke shares pledged by Karvy Stock Broking. With this, the apex court has admitted the appeal of the Securities and Exchange Board of India (Sebi).

“Place hearing for final disposal of order in the second week of April 2024. There shall be a stay of the impugned order of the Securities Appellate Tribunal in so far as Sebi is concerned. In so far as shares pledged with Axis Bank are concerned, there shall be a direction in regard to the status quo. List on Monday in regard to interim relief for banks,” the bench led by Chief Justice of India (CJI) DY Chandrachud said.

 

The matter pertains to an order by SAT issued on December 20 on appeals filed by several lenders to whom defaulter Karvy had pledged securities of its clients to the tune of Rs 1,400 crore. Shares pledged to other lenders like HDFC Bank, Bajaj Finance, ICICI Bank, and IndusInd Bank had been transferred to the clients of Karvy by Sebi and NSDL. The tribunal had ordered compensation to the lenders for these securities within four weeks. The shares pledged to Axis Bank remained intact and had not been encashed. Therefore, SAT had allowed Axis Bank to invoke the pledged share.

Sebi filed an appeal in the Supreme Court on December 30, last year against the SAT order of December 20.

In 2019, Sebi affirmed the misuse of client securities by Karvy Stock Broking. As per the earlier Sebi order in plea by banks, the value of clients’ securities pledged by the stockbroker was over Rs 2,300 crore. Sebi had rejected the banks’ plea to invoke these pledged shares.

The tribunal has allowed Axis Bank to invoke the pledged shares and directed the market regulator to restore the pledge made in favour of other banks and pay compensation.

An aggregate amount of Rs 80.64 crore along with interest was due to Axis Bank from Karvy. The outstanding amount to ICICI Bank was Rs  642.25 crore, while Rs 208.5 crore due to HDFC Bank, a total of Rs 344 crore to Bajaj Finance, and Rs 159 crore to IndusInd Bank — as per the Sebi order dated December 13, 2019.

As Axis Bank had got a stay order from the Debts Recovery Tribunal (DRT, Hyderabad) on the transfer of pledged shares, these shares were not encashed and remain intact. In the case of the other banks, NSDL transferred the pledged shares to the clients of Karvy.

The tribunal had noted that the NSDL or Sebi cannot release or transfer a pledged share without the approval from the pledgee, in this case, the banks. SAT noted that if Sebi and the depository opined that the pledge was wrongly created by Karvy, then the appropriate remedy was to file an application before the National Company Law Tribunal (NCLT) for rectification of its register.