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Hear Bajaj Finance plea: SAT to Sebi

Bajaj Finance’s petition before SAT on Monday had called on Sebi to hear its concerns.

, ET Bureau|
Updated: Dec 04, 2019, 08.14 AM IST
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JP MORGAN ON BAJAJ FINANCE
The tribunal, which hears appeals against Sebi orders, restrained NSDL from transferring the balance of the pledged shares back to Karvy’s clients.
Mumbai: The Securities Appellate Tribunal (SAT) asked the Securities and Exchange Board of India (Sebi) to hear Bajaj Finance’s plea against the capital market regulator, which had asked depositories to return the majority of client shares pledged by Karvy Stock Broking with its lenders.

The tribunal, which hears appeals against Sebi orders, restrained National Securities Depository Ltd (NSDL) from transferring the balance of the pledged shares back to Karvy’s clients.

Bajaj Finance’s petition before SAT on Monday had called on Sebi to hear its concerns over the transfer of shares earlier in the day. Lenders including HDFC Bank, ICICI Bank and IndusInd Bank too moved the tribunal on Tuesday.

They sought a reversal of the transfer of shares against which they had lent to the broking firm.

Depositories on Monday transferred securities worth about Rs 2,013.77 crore to 82,559 clients of Karvy Stock Broking whose shares were illegally pledged with these lenders. This represents 87 per cent of the affected clients. The shares transferred on Monday belonged to Karvy clients who had fully paid for them but were unlawfully pledged through misuse of their powers of attorney (PoA).

The tribunal, without commenting on the merits of the case, directed Sebi to hear Bajaj Finance’s concerns and pass an order before December 10. It will decide on the petitions of the other lenders on Wednesday.

Bajaj Finance’s contention was that Karvy had an outstanding obligation of Rs 345 crore in addition to interest and other charges.

The Sebi order, which was aimed at protecting Karvy’s clients, had deprived lenders of collateral against the loans they had given the broking firm.

Lawyers for Bajaj Finance said that since Karvy violated certain clauses of the loan agreement and withdrew more than the sanctioned amount, a loan recall notice was issued to the firm on November 20. This sought a full refund of the outstanding loan along with interest and charges, failing which Bajaj Finance would invoke the pledged shares. Following the Sebi order, the firm is unable to recover its money, the lawyers said.

Senior counsel Rafique Dada representing Sebi argued that Karvy’s account is not a pool account but a beneficiary client account and Bajaj Finance had not undertaken proper due diligence.

The Hyderabad-based financial services firm had pledged securities worth Rs 2,300 crore of almost 95,000 clients with ICICI Bank, HDFC Bank, IndusInd Bank and Bajaj Finance as collateral to raise loans of more than Rs 600 crore for itself. This was revealed in Sebi’s probe into the client positions of select retail brokers, which is yet to be published. In an ex-parte order on November 22, Sebi banned Karvy from taking on new customers over client defaults worth Rs 2,000 crore.

Bajaj Finance lent to Karvy on the basis of share pledges even after the latest Sebi circular ringfencing client securities and funds had been issued, said Dada. Sebi said in a June circular that brokers must segregate securities and funds of clients. The regulator’s decision came in the wake of various complaints alleging mishandling of clients’ securities and money by errant broking firms. Brokers pledged client shares to raise money from banks and finance companies that were diverted to other businesses such as real estate as in the case of Karvy.

Lawyers representing the other lenders — HDFC Bank, ICICI Bank and IndusInd Bank — asked the tribunal to restore the status quo and allow the shares to be transferred back into an escrow account controlled by Sebi until all the matters were adjudicated.

“While the matter was alive before your Lordship, no one should pull a fast one and steal a march over others because an irreversible transfer was done,” said the counsel for IndusInd Bank. “If overnight they can transfer, then they can bring it back to the escrow account. Forensic audit is just an eyewash because you (depositories) have already transferred the property back to the beneficial owners.”

Sebi counsel Dada asked the tribunal to reject this argument.

“Pledgor Karvy is not ready to admit these were his securities and pledgee (lender) is now saying he has higher rights,” Dada argued. “Karvy is not yet ready to stand up in the court and say anything. Ultimately, Karvy is not contesting at all. A total blank out from Karvy. These banks who are claiming under Karvy can’t have a better right than Karvy.”

NSDL counsel Somasekhar Sundaresan said: “All these banks are also in the business of securities and are depository participants. Common law says that fraud vitiates all solemn acts.”

As a regulator, Sebi should protect everybody, including institutions, HDFC Bank’s lawyer said, adding “investor is not a holy cow.”

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