BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Order Reserved On: 12.12.2019
Date of Decision : 17.12.2019
Appeal Lodging No. 597 of 2019
Axis Bank Limited
Trishul”, 3rd Floor,
Opposite Samartheshwar Temple,
Near Law Garden, Ellisbridge,
Ahmedabad- 380 006
…Appellant
Versus
1. Securities and Exchange Board of India,
SEBI Bhavan, Plot No. C-4A, G-Block,
Bandra-Kurla Complex, Bandra (East),
Mumbai – 400 051
2. Karvy Stock Broking Ltd.
Karvy Millennium, Plot No. 31-P,
Nanakramguda Financial District,
Gachibowli,
Hyderabad- 500 032
3. National Securities Depositaries Ltd.
4th Floor, “A” Wing,
Trade World, Kamala Mills Compound,
Senapati Bapat Marg,
Lower Parel,
Mumbai- 400 013
4. Central Depository Services (India) Limited
Marathon Futurex, A-Wing,
25th Floor, NM Joshi Marg,
Lower Parel,
Mumbai- 400 013
5. National Stock Exchange of India Ltd.
Exchange Plaza, Plot No. C/1,
G Block, Bandra Kurla Complex,
Bandra (E),
Mumbai- 400 051
…Respondents
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Mr. Gaurav Joshi, Senior Advocate with Mr. Neville Lashkari,
Mr. Chaitanya D. Mehta, Ms. Sonali Aggarwal, Mr. Bhanu
Chopra and Ms. Sarika Raju, Advocates i/b M/s Dhruve
Liladhar & Co. for the Appellant.
Mr. Rafique Dada, Senior Advocate with Mr. Anubhav Ghosh
and Ms. Rashi Dalmia, Advocates i/b The Law Point for
Respondent No. 1
Mr. KRCV Seshachalam, Advocate with Ms. Sabeena Mahadik
and Mr. Aayush Kothari, Advocates i/b Visesha Law Services
for Respondent No. 2
Mr. Somasekhar Sundaresan, Advocate with Mr. Rohan
Dakshini, Ms. Aakanksha Saxena, Ms. Kinjal Shah and Ms. E.
Srivastava, Advocates i/b Rastrukent & Partners for Respondent
No. 3
Mr. Somasekhar Sundaresan, Advocate with Ms. Shruti Rajan,
Mr. Aditya Sikka and Mr. Pratham Masurekar, Advocates i/b
Cyril Amarchand Mangaldas for Respondent No. 5
CORAM: Justice Tarun Agarwala, Presiding Officer
Dr. C.K.G. Nair, Member
Justice M. T. Joshi, Judicial Member
Per: Dr. C.K.G. Nair
1.
This
appeal
has
been
filed
aggrieved
by
the
communication dated November 23, 2019 issued by the
National
Securities
Depository
Limited
(“NSDL”
for
convenience), Respondent No. 3 whereby preventing the
appellant from accessing the securities pledged with the
appellant by Karvy Stock Broking Limited (“Karvy” for
convenience), Respondent No. 2. Since the said communication
was issued pursuant to an ex-parte ad-interim order dated
3
November 22, 2019 and a related order dated November 29,
2019 both passed by the Whole Time Member (“WTM” for
convenience) of Securities and Exchange Board of India
(“SEBI” for convenience) in the matter of Karvy the said orders
also have been impugned.
2.
The order dated November 22, 2019 was passed by the
WTM of SEBI following a report from the National Stock
Exchange of India Limited (“NSE” for convenience) relating to
pledging of client securities by Karvy by allegedly misutilizing
the power of attorney granted by the clients. The said order
inter alia directed the following in paragraph 21(iv) of the said
order:-
“(i) KSBL is prohibited from taking new
clients in respect of its stock broking
activities;
(ii) The Depositories i.e. 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;
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(iii) The Depositories shall monitor the
movement of securities into and from the
DP account of clients of KSBL as DP to
ensure that clients’ operations are not
affected;
iv) The Depositories shall not allow transfer
of securities from DP account no.
11458979,
named
KARVY
STOCK
BROKING LTD (BSE) with immediate
effect. The transfer of securities from DP
account no. 11458979, named KARVY
STOCK BROKING LTD (BSE) shall be
permitted only to the respective beneficial
owner who has paid in full against these
securities, under supervision of NSE; and
(v) The Depositories and Stock Exchanges
shall initiate appropriate disciplinary
regulatory
proceedings
against
the
Noticee for misuse of clients’ funds and
securities as per their respective bye laws,
rules and regulations;………….”
Thereafter, an appeal filed by Karvy before this Tribunal
seeking flexibility in using the power of attorney was remanded
to SEBI which was disposed of by the WTM of SEBI by order
dated November 29, 2019. Further a number of lenders who
were impacted by the order dated November 22, 2019,
5
particularly direction no. (iv) in paragraph 21 of the said order
approached this Tribunal by filing Appeal Lodging Nos. 585 of
2019, 588 of 2019, 589 of 2019 and 590 of 2019 which were
also disposed of vide our orders dated December 03, 2019 and
December 04, 2019.
3.
The appellant is a bank who has lent money to Karvy on
the basis of securities pledged by Karvy. It is the contention of
the appellant that its position viz-a-viz other lenders who came
on appeal before this Tribunal earlier is different in the sense
that while the other lenders/ appellants were directly impacted
by direction no. (iv) in paragraph 21 of the November 22, 2019
order of the WTM of SEBI, it is the illegal extension of that
order by NSDL that has impacted the appellant. This is because
vide direction no. (iv) (Supra) only a particular account of
Karvy was frozen; there is no such direction relating to freezing
or restricting in any manner the account relevant to the
appellant. As on December 07, 2019 an aggregate amount of
about ` 81 crores and further interest etc. are due to the
appellant from Karvy which was given in the form of overdraft
against shares (“OAS”) from time to time. It is the contention
of the appellant that providing credit against pledged securities
is an approved business of the appellant and its business is in
6
conformity with the Circulars issued by SEBI from time to time
regarding providing loans/ funds against pledged securities.
4.
Shri Gaurav Joshi, learned Senior Counsel appearing on
behalf of the appellant submits that the ex-parte ad-interim order
dated November 22, 2019 passed by the WTM of SEBI did not
contain any direction preventing the appellant from operating
Demat Account No. 19502787 which is named “Karvy Stock
Broking Limited- Client Account-NSE CM”.
Because vide
direction contained in para 21(iv) of the said order restriction
was imposed only on DP Account No. 11458979, named
KARVY STOCK BROKING LTD (BSE). Therefore, other DP
Account Numbers of Karvy including Account No. 19502787
was not under any restrictions. However, by the impugned
communication, Respondent No. 3, NSDL has kept the said
account in abeyance and hence the appellant could not invoke
the pledge when tried to do so. The operational part of this
communication of NSDL is as follows:-
“SEBI advised Depositories, as a proactive and
interim measure, to take all immediate necessary
actions to protect the interest of investors, whose
shares have been pledged. Accordingly, based
on the information provided by NSE, such client
7
securities that appear to be pledged are
therefore under a state of abeyance.”
5.
It is the submission of the leaned Senior Counsel that the
pledged account namely “Karvy Stock Broking Limited- Client
Account-NSE CM” is clearly a client account but it is factually
on record that this is an account of the client securities where
the clients have outstanding obligations towards Karvy and as
such Karvy has legitimately pledged those securities and
borrowed funds from the appellant. Voluminous data was also
produced to prove this contention wherein client wise details of
the number and value of securities, outstanding obligation of
each client and the value of pledge etc. are given. Further, this
was not a secret account like DP Account No. 11458979, named
KARVY STOCK BROKING LTD (BSE) and it was always
under the supervision of the Depositories and Exchange who are
respondents in this appeal. Therefore, it was contended that, in
the absence of an explicit direction from SEBI, NSDL could not
have frozen the account or kept the rights of the appellant in
abeyance by the impugned communication.
6.
The learned Senior Counsel further contended that under
the provisions of the Depositories Act, 1996 the pledgee has
8
rights over the securities pledged and such rights could not be
arbitrarily kept in abeyance or extinguished without following
due process and in the instant case the appellant was not even
given an opportunity of being heard by either NSDL or SEBI or
any other respondents herein.
Accordingly, appellant seeks
reliefs as under:a)
Quashing
of
the
communication
dated
November 23, 2019 and as well as the orders
passed by the WTM of SEBI dated November
22, 2019 and November 29, 2019, if the later
two orders are interpreted to cover the
securities in Client ID No. 19502787.
b)
The respondents be restrained from in any
manner preventing the appellant from invoking
the pledge on shares in Demat Account having
Client ID No. 19502787.
Further the appellant seeks various interim reliefs inter alia
seeking stay of the impugned directions, restraining the
respondents from preventing the appellant from invoking the
pledge, maintaining status quo in respect of the shares pledged
in favour of the appellant in the Demat Account No. 19502787
to prevent any further transfer of the said shares etc.
7.
Learned counsel Shri Somasekhar Sundaresan, appearing
on behalf of Respondent Nos. 3 and 5 (NSDL and NSE) raised a
9
preliminary
objection
contending
that
the
impugned
communication from Respondent No. 3 NSDL is not appealable
before this Tribunal as the mandate of this Tribunal is restricted
to appeals under Section 15T of the SEBI Act, 1992 and Section
23A of the Depositories Act, 1996. Further without prejudice to
the above submissions, the learned counsel contended that as is
made clear in the said communication itself such a measure was
taken in order to protect the interest of investors and as advised
by SEBI in its ex-parte ad-interim order dated November 22,
2019 in paragraph 21(ii), which reads as follows:“The depositories i.e. 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.”
8.
Learned Senior Counsel Shri Rafique Dada, representing
Respondent No. 1, SEBI submits that the appellant was aware
of the Circulars issued by SEBI in relation to treatment of
clients’ securities etc.
The Circular dated June 20, 2019
regarding handling of clients’ securities by trading members/
clearing members had categorically stated that under no
10
circumstances the trading members like Karvy could have
pledged clients’ securities beyond September 30, 2019. Clause
4.8 of the Circular makes it very clear that the securities pledged
shall “either be unpledged and returned to the clients upon
fulfillment of pay-in obligation or disposed off after giving
notice of 5 days to the client”. Therefore, the appellant wrote to
SEBI on October 03, 2019, after the expiry of the said three
months’ transition time provided by the June 20, 2019 Circular,
seeking advice as to whether Karvy could be permitted three
more months time to unpledge the shares pledged with them. It
was further submitted that Karvy in turn proposed to the
appellant a swapping arrangement of collaterals provided
against credit facilities availed by Karvy which the appellant did
not accept due to their own commercial consideration.
9.
The learned Senior Counsel for SEBI further submitted
that a Forensic Audit as directed by SEBI into the operations of
Karvy is under progress. Only after receiving that report, which
may take another three months more, the factual position
relating to whether securities in the account under question
belong to clients or whether it is a mix of client securities and
Karvy securities on account of default of clients etc can be
ascertained. Therefore, right now, without any prejudice to the
11
fact that appellant is an affected party, the securities in the said
account cannot be handed over to the appellant. What is stated
in the impugned communication from NSDL is that, securities
in the account are kept in abeyance; not that securities are
alienated. According to the learned senior counsel there is no
need of any intervention at this stage.
10. The learned counsel representing Respondent No. 2
Karvy, on a specific query from the bench, submitted that if
they are allowed to operate their accounts and transfer the
securities rightly belonging to them they will be able to pay up
their dues towards the appellant.
11. Having heard the learned counsel for the parties, and
having perused the documents, we are of the view that the
preliminary objection regarding maintainability of the appeal is
not sustainable since the appellant is an affected party impacted
by all the impugned communications/ orders together which the
appeal is also challenging. It is a fact that the appellant as a
bank has lent funds to Karvy under a permitted Loan against
Shares arrangement and under the Depositories Act, rights and
sanctity are provided to such pledged accounts. Therefore, the
appellant is an affected party is clearly undisputed. It is also a
fact that the appellant was not heard either by SEBI or by the
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Exchanges or Depositories before passing the impugned
directions. Though, the account frozen explicitly by the WTM
of SEBI by order dated November 22, 2019 is not the same
account as that of the appellant implicitly the order has got
extended to such accounts because of the sweeping nature of the
WTM’s directions to protect the interest of the investors. Hence
the action by Respondent No. 3 NSDL is also a consequential
one as clearly stated in their communication.
12. Though the learned Senior Counsel for the appellant seeks
to suggest a solution stating that some of the investors in fact
owe dues to Karvy and hence securities to the extent of such
dues rightly belonging to Karvy at least could be used by the
appellant to invoke the pledge so that at least part of the funds
would be available to the appellant. We are not in a position to
ascertain the veracity of the information as provided by Karvy
to the appellant.
Therefore, in view of the facts and
circumstances of the case we direct the appellant to file an
appropriate representation before SEBI. If such an application
is filed SEBI will hear the appellant and other relevant entities
and pass appropriate directions within 15 days from the date of
this order. In the interim status quo shall be maintained in
13
respect of the securities in Account No. 19502787 named
“Karvy Stock Broking Limited- Client Account-NSE CM”.
13. Appeal is disposed of on above terms at the stage of
admission itself. No order on costs.
Sd/Justice Tarun Agarwala
Presiding Officer
Sd/Dr. C.K.G. Nair
Member
Sd/Justice M. T. Joshi
Judicial Member
17.12.2019
Prepared & Compared By: PK