Karvy Case: ICICI Bank Topped Up Collateral Just In Time, But…

The Hyderabad Debt Recovery Tribunal, in an interim order, has directed Karvy Stock Broking Ltd. and its promoters to deposit sufficient security with the tribunal to cover the claim made by ICICI Bank Ltd.The private lender had moved the DRT to recover dues worth Rs 629 crore from the stockbroker for the money it lent over time against shares in Karvy’s demat account.The dispute stems from the Securities and Exchange Board of India’s Nov. 22 order that found Karvy illegally pledged client shares to raise funds for private use, and ordered it to return the securities.After the shares were transferred from the broker’s pool account to client accounts, ICICI Bank and three other lenders petitioned SEBI to restore the shares to them since Karvy had pledged the securities to borrow money. The regulator, however, asked the lenders to move a competent civil court, and the matter landed at the DRT.But with the collateral no longer available, what are ICICI Bank’s chances of recovering its money?.Extra Collateral.SEBI, in a June 20 circular, barred brokers from pooling client securities and using clients’ power of attorney to either pledge or transact in securities held on their behalf. The regulator gave brokers until Sept. 1 to comply but extended the deadline by a month till Sept. 30. Brokers were supposed to reverse any outstanding pledges and return securities to clients who had paid in full.Loan documents filed with the Registrar of Companies and reviewed by BloombergQuint indicate that ICICI Bank renewed its loan pact with Karvy on Sept. 25, implying that the bank accepted a pool of clients’ securities as collateral just five days prior to the deadline to end such a practice.But ICICI Bank also sought additional collateral besides shares. According to the documents, the bank took first charge to 10 immovable properties of Karvy’s promoter C Parthasarathy and guarantees from the promoters and a promoter company Compar Estates and Agencies Pvt. Ltd.While ICICI Bank declined to comment on the matter, it was probably the impending regulatory deadline and the impact on the underlying collateral that prompted the lender to seek additional collateral as a cautionary measure.Still, even this additional collateral may not cover the full loan amount. The DRT’s interim order mentions that “other securities extended by Defendants No. 1 and 2 (Karvy and C Parthasarathy) are not adequate to cover the total debt owed by the defendants…”.Walking On The EdgeDetails in the loan renewal agreement between ICICI Bank and Karvy suggest that the bank was aware that Karvy was pledging clients’ securities, though the lender may have been unaware that the broker was doing so without specific client instructions.The bank in the renewal letter—signed between ICICI Bank and C Parthasarathy and Rajat Parthasarathy—referred to SEBI’s June circular that mandated borkers to maintain three accounts for clients’ securities.Client Unpaid Securities Account: Securities where the full payment was not received from the client. According to SEBI guidelines, these securities should either be transferred to clients’ demat account on full payment or disposed of in five working days.Client Margin Trading Securities Account: Securities bought under margin trading facility.Client Collateral Account: Client securities received as collateral. SEBI guidelines clearly say that these securities shall be used only for meeting client’s margin requirement by way of depositing the same with stock exchange/clearing corporation/clearing house; and not for borrowing funds by pledging these securities with a bank or a non-bank lender.ICICI Bank asked Karvy to provide registered power of attorney to operate the designated demat accounts favouring the lender, according to the document.The terms of the pledge included maintaining a security cover of 2x—the value of clients’ shares Karvy pledged must be twice the value of the loan. Karvy had to provide 1.25x cover in Nifty 50 shares and 0.75x in other specified securities.Apart from barring brokers from using clients shares for personal borrowing, SEBI guidelines said the unpaid securities account has to be cleared in five working days.Yet, Karvy was able to raise funds from lenders using these accounts..DRT CaseIn its application to the DRT, ICICI Bank sought to:Restrain the Parthasarathys from leaving the country and make them deposit passports with the Tribunal till the disposal of the case.Order attachment of assets belonging to Karvy Stock Broking, the Parthasarathys, and Compar Estates and Agencies.Direct them to furnish securities sufficient to satisfy any recovery certificate issued by the DRT.Restrain Karvy and the Parthasarathys from dealing, disposing, encumbering, transferring or creating third-party interest over secured properties identified by the bank.Appoint a receiver to take over secured properties identified by the bank in its application and sell such properties through auction and appropriate the proceeds against the debt owed to the bank.The DRT’s interim order on Dec. 9…Asked Karvy Stock Broking, Compar Estates and the Parthasarthys to deposit sufficient security to the extent of bank's claim within 15 days of receiving the order.Restrained Karvy Stock Broking, Compar Estates and the Parthasarathys from creating any encumbrance or from disposing, alienating or creating third-party rights on the properties identified by the bank in its application.Appointed an advocate commissioner to take possession of the movable and immovable properties identified by the bank in its application.The DRT will next hear the matter on Jan. 9..How To Sign Up For BloombergQuint Story Notifications

Karvy Case: ICICI Bank Topped Up Collateral Just In Time, But…

Hyderabad DRT directed Karvy and its promoters to deposit sufficient security with the tribunal to cover ICICI Bank’s claim.

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