SAT slams NSDL, SEBI for 'highway robbery' of Karvy lenders

The Securities Appellate Tribunal (SAT) on Wednesday quashed two orders passed by the Securities and Exchange Board of India (SEBI) prohibiting Axis Bank, ICICI Bank, HDFC Bank, IndusInd Bank and Bajaj Finance from revoking shares pledged with them by Karvy Stock Broking Limited. [Axis Bank v. SEBI and Ors].SEBI in its orders had reasoned that the pledges were incorrectly created by stock broking company Karvy.A coram of Presiding Officer Justice Tarun Agarwala and technical member Meera Swarup said that if the pledge was wrongly created by Karvy, then the appropriate remedy for SEBI or the National Securities Depositaries Limited (NSDL) was an application before the National Company Law Tribunal (NCLT) for rectification of its register.The Appellate Tribunal expressed dissatisfaction with the fact that this process was not followed. It criticized NSDL for transferring the pledged shares to Karvy's clients without proper legal authority, likening the action to that of a highway robber."This process was not done and like a highway robber NSDL through illegal directions from SEBI transferred the pledged shares (which were fungible) to the clients of Karvy which action was without any authority of law," the order stated..Karvy owed the appellant banks close to ₹1,400 crore after overdraft facilities were extended to the company against the pledged shares. Notably, these shares belonged to the clients of Karvy who had a debit balance with the broker.SEBI had held that the pledges were wrongly created by Karvy by including securities of clients who had no debit balance and, therefore, could not be invoked by the appellants.As a consequence, NSDL, without revoking or cancelling the pledges, transferred the shares to Karvy's clients. Axis Bank's shares remained intact after it obtained a stay order on transfer of shares from the Debts Recovery Tribunal (DRT) in Hyderabad..The appellants argued that SEBI, NSDL and the National Stock Exchange (NSE) had unilaterally unpledged the shares, rendering them unsecured creditors. They maintained that the pledges were compliant with the Depositories Act and Depositories and Participants (DP) Regulations, and asserted their right to enforce the pledge..On the other hand, the respondents maintained that the pledges were wrongly created and, therefore, could not be invoked by the appellants.Further, relying on the Supreme Court's decision in PTC India Financial Services Ltd v. Venkateshwarlu Kari and Anr, they contended that the Depositories Act does not override the Contract Act and other general laws such as the Sales of Goods Act and the Companies Act..Based on its decision in HDFC Bank Ltd v. SEBI, as well as provisions of the Depositories Act and NSDL bye-laws, SAT concluded that neither NSDL nor SEBI could release or transfer a pledged share without the consent of the appellants.A press release issued by NSDL on December 2, 2019 indicated that the pledged shares were transferred as per the directions of SEBI and under the supervision of NSE.The Appellate Tribunal held that SEBI had no power to transfer pledged shares in contravention of the Depositories Act, the Securities and Exchange Board of India (Depositories and Participants) Regulations (DP Regulations) and the Contract Act."The pledgee, namely, the appellants are entitled to retain possession of the pledge till such time their liabilities are not cleared by the pledgor as held by the Supreme Court in PTC India Financial Services Ltd. (supra)," the order stated.Thus, it concluded that it was arbitrary on the part of SEBI to direct NSDL to transfer the pledged securities to the broker's clients without considering that the shares were pledged in favour of the appellants and who had a right of possession."We are of the view that so long as the pledge is created under the Depositories Act read with DP Regulations until and unless the pledge is revoked the shares cannot be transferred under the directions of SEBI through NSDL. Such action is patently illegal and without jurisdiction," the SAT emphasized..Further, it noted that Section 59(4) of the Companies Act provided an appropriate remedy to SEBI and NSDL in the form an application before the NCLT for rectification of its register.Since the same was not done, the action of the respondents to prohibit the appellants from revoking the pledges was illegal and without any authority of law."The shares so removed and transferred by NSDL under the directions of SEBI are liable to be restituted," SAT ordered..Accordingly, it allowed the appeals and quashed the two orders by SEBI. It permitted Axis Bank to invoke the shares. For the other appellants, SEBI was directed to restore the pledges made in their favour within four weeks. In the alternative, it directed SEBI, NSE and NSDL to compensate the appellants with the value of the pledged securities along with interest at 10% per annum..Senior Advocate Gaurav Joshi and Advocates Neville Lashkari, Chaitanya Mehta, Sonali Aggarwal and Pranvi Jain appeared for Axis Bank.Advocates Sandeep Parekh, Sudarshana Basu and Lipika Vinjamuri appeared for ICICI Bank.Advocate Atika Vaz represented Bajaj Finance.Senior Advocate Gaurav Joshi and Advocates Sameer Pandit and Krina Gandhi appeared for HDFC Bank.Senior Advocate Pesi Modi and Advocates Tomu Francis, Kunal Katariya, Arka Saha, Zarnaab Aswad and Apoorva Upadhyay appeared for IndusInd Bank.Senior Advocate Shiraz Rustomjee and Advocates Manish Chhangani, Samreen Fatima and Sumit Yadav represented SEBI.Advocates Somasekhar Sundaresan, Kinjal Shah and Etika Srivastava appeared for NSDL.Senior Advocate Darius Khambata along with Advocates Somasekhar Sundaresan, Indranil Deshmukh, Animesh Bisht, Drishti Das, Vidhi Shah, Roma Bhojani, Karan Sangani and Rima Jain appeared for NSE.Advocates Jehangir Jejeebhoy and Silpa Nair represented CDSL..[Read Order]