BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Order Reserved on: 03.12.2019
Date of Decision
: 04.12.2019
Appeal (L) No. 588 of 2019
HDFC Bank Ltd.
HDFC Bank House,
Senapati Bapat Marg,
Lower Parel (West),
Mumbai – 400 013.
….. 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.
National Securities Depository Limited
4th Floor, ‘A’ Wing, Trade World,
Kamala Mills Compound,
Senapati Bapat Marg,
Lower Parel,
Mumbai – 400 013.
3.
National Stock Exchange of India Limited
Exchange Plaza, Plot No. C/1,
G-Block, Bandra Kurla Complex,
Bandra (East),
Mumbai – 400 051.
4.
Karvy Stock Broking Limited
Karvy House, 46,
Avenue 4, Street No. 1,
Banjara Hills,
Hyderabad – 500 034.
.…Respondents
2
Mr. Gaurav Joshi, Senior Advocate with Mr. Sameer Pandit
and Ms. Krina Gandhi, Advocates i/b Wadia Ghandy & 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. Somasekhar Sundaresan, Advocate with Ms. Kinjal Shah
and Ms. Etika Srivastava, Advocates i/b Rashmikant &
Partners for Respondent No. 2.
Mr.
Venkatesh
Dhond,
Senior
Advocate
with
Mr. Somasekhar Sundaresan, Ms. Shruti Rajan, Mr. Aditya
Sikka, Ms. Drishti Das and Mr. Pratham Masurekar,
Advocates i/b Cryil Amarchand Mangaldas for Respondent
No. 3.
Mr. Vikram Nankani, Senior Advocate with Mr. KRCV
Seshachalam, Ms. Sabeena Mahadik, Mr. Pankaj Uttaradhi,
Mr. Sagar Hate and Mr. Aayush Kothari, Advocates i/b
Visesha Law Services for Respondent No. 4.
WITH
Appeal (L) No. 589 of 2019
ICICI Bank Limited
ICICI Bank Towers,
Bandra Kurla Complex,
Mumbai – 400 051.
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 Limited
Karvy House, 46,
Avenue 4, Street No. 1,
Banjara Hills,
Hyderabad – 500 034.
….. Appellant
3
3.
National Stock Exchange of India Limited
Exchange Plaza, Plot No. C/1,
G-Block, Bandra Kurla Complex,
Bandra (East),
Mumbai – 400 051.
4.
National Securities Depository Limited
4th Floor, ‘A’ Wing, Trade World,
Kamala Mills Compound,
Senapati Bapat Marg,
Lower Parel,
Mumbai – 400 013.
.…Respondents
Mr. Sandeep Parikh, Advocate with Ms. Deepika Goyal and
Ms. Sudarshana Basu, Advocates i/b Finsec Law Advisors 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. Vikram Nankani, Senior Advocate with Mr. KRCV
Seshachalam, Ms. Sabeena Mahadik, Mr. Pankaj Uttaradhi,
Mr. Sagar Hate and Mr. Aayush Kothari, Advocates i/b
Visesha Law Services for Respondent No. 2.
Mr.
Venkatesh
Dhond,
Senior
Advocate
with
Mr. Somasekhar Sundaresan, Ms. Shruti Rajan, Mr. Aditya
Sikka, Ms. Drishti Das and Mr. Pratham Masurekar,
Advocates i/b Cryil Amarchand Mangaldas for Respondent
No. 3.
Mr. Somasekhar Sundaresan, Advocate with Ms. Kinjal Shah
and Ms. Etika Srivastava, Advocates i/b Rashmikant &
Partners for Respondent No. 4.
AND
Appeal (L) No. 590 of 2019
IndusInd Bank Limited
2401, General Thimmayya Road,
Pune – 411 001.
Versus
….. Appellant
4
1.
Securities and Exchange Board of India,
SEBI Bhavan, Plot No. C-4A, G-Block,
Bandra-Kurla Complex, Bandra (East),
Mumbai – 400 051.
2.
National Securities Depository Limited
Trade World, 4th Floor,
Kamala Mills Compound,
Senapati Bapat Marg,
Lower Parel,
Mumbai – 400 013.
3.
National Stock Exchange of India Limited
Exchange Plaza, Plot No. C/1,
G-Block, Bandra Kurla Complex,
Bandra (East),
Mumbai – 400 051.
4.
Karvy Stock Broking Limited
Karvy House, 46,
Avenue 4, Street No. 1,
Banjara Hills,
Hyderabad – 500 034.
.…Respondents
Mr. P.N. Modi, Senior Advocate with Mr. Kunal Katariya,
Mr. Tomu Francis, Mr. Manish Chhangani and Mr. Arka
Saha, Advocates i/b Khaitan & 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. Somasekhar Sundaresan, Advocate with Ms. Kinjal Shah
and Ms. Etika Srivastava, Advocates i/b Rashmikant &
Partners for Respondent No. 2.
Mr.
Venkatesh
Dhond,
Senior
Advocate
with
Mr. Somasekhar Sundaresan, Ms. Shruti Rajan, Mr. Aditya
Sikka, Ms. Drishti Das and Mr. Pratham Masurekar,
Advocates i/b Cryil Amarchand Mangaldas for Respondent
No. 3.
Mr. Vikram Nankani, Senior Advocate with Mr. KRCV
Seshachalam, Ms. Sabeena Mahadik, Mr. Pankaj Uttaradhi,
Mr. Sagar Hate and Mr. Aayush Kothari, Advocates i/b
Visesha Law Services for Respondent No. 4.
5
CORAM : Dr. C.K.G. Nair, Member
Justice M.T. Joshi, Judicial Member
Per : Dr. C.K.G. Nair, Member
1.
These three appeals have been filed challenging the
ex parte ad interim order dated November 22, 2019 passed by
the Whole Time Member (‘WTM’ for short) of the Securities
and Exchange Board of India (‘SEBI’ for short) in the matter
of M/s. Karvy Stock Broking Ltd. (‘Karvy’ for short). Since
all these appeals challenge the same impugned order and the
basic issues are common, by consent of the parties, all these
appeals are heard together and disposed of by this common
decision.
2.
Appellants are banks who lent varying amounts of
money to Karvy on the basis of pledged securities. The issues
covered in these appeals are the same as in the matter of Bajaj
Finance Limited vs SEBI, Appeal (L) No. 585of 2019
decided on December 3, 2019 by this Tribunal. Accordingly,
we do not propose to deal with the details of the background
as the same are covered in the said order. However, for
convenience, we reproduce direction no. (iv) as contained in
paragraph 21 of the impugned order as follows, since it is the
basic issue of contention.
6
“(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;”
3.
The additional submissions brought out in these appeals
are (i) an ex parte ad interim order can only maintain status
quo with regard to the securities and that too when a forensic
audit is underway and (ii) the relevant provisions of the
Depositories Act gives possession of the securities to the
beneficial owner which in this case is Karvy. By pledging
those securities to the Appellants and borrowing money,
vested rights for the pledgees in those securities have been
created. Therefore, pending determination of rights, securities
in the disputed account should not have been transferred back
to the clients account. In short, the ex parte ad interim order
should have been used only in disabling Karvy who alleged to
have played fraud and all other activities relating to transfer
of securities as contained in direction no. (iv) quoted above
should have waited for the completion of forensic audit and
exact determination of rights of the parties. It was also argued
that the second sentence in direction no. (iv) was only an
7
advisory and not a direction and hence NSDL should not have
transferred the securities back to the clients accounts.
Therefore, transferring the securities, while a forensic audit is
pending, and through an ex parte ad interim order is a clear
over reach by the Respondents SEBI, NSDL and NSE and
beyond the provisions of law.
4.
We have heard the learned Senior Counsel and Counsel
appearing for the three Appellants as well as for the four
Respondents. The learned senior counsel and counsel
appearing for the Appellants emphasized Section 12 of the
Depositories Act, 1996 which deals with pledge or
hypothecation of securities held in a depository and the details
relating to the same in the SEBI (Depositories and
Participants) Regulations, 1996. They also explained how
NSDL implements the above provisions in actual practice
through certain provisions of their bylaws and business rules.
It was also emphasized that various circulars relating to these
provisions have been issued only to Stock Exchanges,
Depositories and other related intermediaries regulated by
SEBI and not to the Appellants and hence the mandate of due
diligence and compliance with the provisions falls squarely
on those entities. Given these provisions of law the lenders
8
lend money on the basis of pledged securities bonafide
believing that the securities belong to Karvy since the account
namely Karvy Stock Broking Ltd. (BSE) did not indicate that
it was a client account. Therefore, by means of the pledge and
as provided under the Depositories Act and Regulations
thereunder, when the pledge was created by Karvy, the
pledgees had the right over the securities pledged. Even if, it
is assumed that some of these securities were belonging to
clients those clients through a power of attorney had
delegated those rights to Karvy and hence those securities
were with Karvy. Therefore, given the provisions in the
Depositories
Act
and
the
Regulations
relating
to
hypothecation and pledge and the rights of such pledgees
those securities could not have been alienated without full
determination of facts and ownership rights through an ex
parte ad interim order. It was also contended that the transfer
of securities back to the clients has been done when the matter
was pending before this Tribunal, pre-empting the Tribunal
action.
5.
Learned Senior Counsel representing Respondent No. 1,
SEBI contended that the June 20, 2019 circular of SEBI
clearly emphasized that the clients’ securities could not be
9
pledged by the brokers and an elaborate mechanism was
provided for ring fencing the clients’ securities and funds and
these directions had to be implemented latest by August 31,
2019. Therefore, it was incumbent on the part of the
Appellants / lenders to revisit their due diligence while
continuing with or taking fresh pledges of securities and
lending against them, particularly when the account in
question was a “non-house beneficiary” account. It was also
contended that in any case the rights of the pledgee is not
above the rights of the pledger. Moreover, Respondent Karvy
does not say anything relating to who owns those pledged
securities.
6.
Learned Senior Counsel and Counsel representing NSE
and NSDL have submitted that whatever transfers have been
done to the accounts of the actual shareholders has been done
on the basis of thorough verification of payment and
ownership. They also produced on record a letter from NSE to
NSDL confirming full payment by 83862 clients and a
correspondence of NSDL with WTM of SEBI also informing
the approval of the Board of Directors of NSDL relating to
such action. All these correspondences are dated November
30, 2019. So, effectively as directed by WTM of SEBI in the
10
second part of direction no. (iv) the NSDL and NSE were
doing their due diligence and in consultation with SEBI
effected the transfer of securities to the clients who have paid
in full and who were the real beneficial owners of those
securities. Learned Senior Counsel for Respondent Karvy
does not wish to make any statement.
7.
Having heard the learned Senior Counsel and Counsel
for the parties, without going into the merit of the case, we are
of the considered view that beyond the directions passed in
our order of Bajaj Finance Ltd. (supra) no further relief can
be granted at this stage. We have no dispute with the
interpretations of the provisions of the Depositories Act and
Regulations thereunder. However, while dealing with a case
of alleged fraud the implications of the same have to be
factored in. The very purpose of an ex parte ad interim order
is to deal with the eventualities arising from such alleged
fraud or similar major violations. This ex parte ad interim
order was issued on November 22, 2019. Even an oral
mentioning was made by the Appellants before this Tribunal
only on December 2, 2019 by which time a lot of water has
flown under the bridge. Now it is on record before us that
after a due diligence by NSE and NSDL securities have been
11
transferred to the account of the clients. Therefore, further
rights have been created / restored involving more than
80,000 investors. In this context, a prayer to recall the same or
to retain the same as frozen accounts of those clients becomes
untenable. As ordered in the matter of Bajaj Finance Ltd.
(supra), Appellants are at liberty to approach SEBI. If any
representations from the Appellants are pending or filed on or
before December 6, 2019 before SEBI, the WTM of SEBI,
after providing an opportunity of hearing to the Appellants,
shall pass an order in accordance with law latest by December
12, 2019.
8.
All these three appeals are disposed of on above terms
with no order on costs.
Sd/Dr. C.K.G. Nair
Member
Sd/Justice M.T. Joshi
Judicial Member
04.12.2019
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