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SAT asks NSDL to hold back remaining stocks of Karvy clients

The SAT order came on a plea from affected lenders-- HDFC Bank, ICICI Bank, Indusind Bank and Bajaj Finance.

Updated: Dec 03, 2019, 08.55 PM IST
Karvy Quagmire: Broker, Sebi or banks. Whose fault is it anyway?
Karvy Quagmire: Broker, Sebi or banks. Whose fault is it anyway?
Mumbai: In an interim relief to the lenders, the Securities Appellate Tribunal (SAT) on Tuesday asked NDSL not to transfer any more shares to the clients of the crippled Karvy Broking.

Issuing an interim stay, a two-member SAT bench comprising MT Joshi and CKG Nair said the final order will be issued Wednesday afternoon.

The SAT order came on a plea from affected lenders-- HDFC Bank, ICICI Bank, Indusind Bank and Bajaj Finance-- which challenged NSDL's Monday decision to transfer shares from now-banned Karvy Broking back to 83,000 clients, which helped almost 90 percent of the demat accountholders of brokerage to recover their investments.

Since most of the shares were kept as securities for loans made by banks, and "unilateral" transfer of shares will have a chilling effect on this stream of lending, HDFC Bank, ICICI Bank and Indusind Bank told the SAT during the hearing.

Karvy had misused securities of over 95,000 clients which it was holding on behalf of the clients to raise over Rs 600 crore in loans.

Following an order from the capital markets regulator Sebi, National Securities Depository (NSDL) on Monday transferred back stocks of nearly 83,000 clients.

Bajaj Finance was the first to challenge NSDL move at the SAT within hours of the transfers, and the banks joined it on Tuesday.

Banks claimed that such "unilateral" transfer of shares, which are pledged with them as securities for borrowings, will deeply impact the entire business of loans against shares and will prevent them from undertaking this business in toto.

As a solution, senior counsel representing banks pleaded for shares to be either clawed back from clients and frozen in an escrow account and warned that if the securities come back to the open market, it will be "irreversible".

Banks also said they cannot be forced to pay for the "sins" of the regulators and the regulated companies.

During the course of the arguments, a counsel for HDFC Bank said the largest private sector lender alone has a Rs 300 crore exposure where the shares worth over Rs 470 crore have been pledged.

Counsel for NSDL said depository acted only as per Sebi order and drew focus on a Sebi order of June 2019 which made it clear that such pledges might be untenable and alleged that banks have been "recklessly" lending to brokerages.

During the day-long arguments, the NSDL counsel told SAT that the decision to transfer back the shares to clients was made by the NSDL board after a lot of thoughts.

The NDDL counsel also pointed out banks should have been aware of the Sebi order since all these banks which have challenged the NSDL also run dedicated broking arms.

SAT reserved the order and said the final order will be delivered at 1400 hrs Wednesday.

On Monday, Sebi had directed NSDL to transfer the investors' securities, held by Karvy Stock Broking in their respective accounts. The decision resulted in nearly 83,000 investors getting back their securities that were illegally transferred by the broker to its own account and were even pledged without any authorisation.

With this transfer by NSDL, nearly 90 percent investors received their securities.

Karvy has taken loans to the tune of Rs 600 crore by pledging securities worth over Rs 2,300 crore of 95,000 clients with lenders, including Bajaj Finance.

Of these, 95,000 clients, nearly 83,000 have got back their securities, which were illegally transferred by Karvy to its own account and then used for other purposes including raising funds.

The ruling halting further transfer of shares came following an appeal by Bajaj Finance, which has given loans worth Rs 345 crore to Karvy against pledged securities.

Bajaj Finance moved the tribunal against the Sebi order passed on November 22, which prohibited transfer of securities from an Karvy accounts with immediate effect, saying due to this directive the non-banking finance company could not invoke the pledge.

The regulator had also barred Karvy from taking new clients in respect of its stock broking activities and also prevented it from using the power of attorney (PoA) given by clients after the broker was found to have allegedly misused clients' securities.

The order was a result of a report by NSE on the non- compliances observed with respect to pledging/misuse of client securities by Karvy.

"In the interim further transfer of securities shall remain suspended from DP account...named Karvy Stock Broking," the tribunal said.

SAT has asked the regulator to hear "Bajaj Finance on the basis of their representation dated November 23 and or any other additional representation which they may like to make and given time till December 4 to make more representation.

It further directed Sebi "to consider the representation(s) of the appellant and, after giving an opportunity for personal hearing, pass an order as per law latest by December 10".

In another blow, the both the BSE and the NSE had on Monday suspended Karvy's trading licence as well.

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