Karvy Case: SAT Directs Banks To Approach SEBI On Pledged Shares

The Securities Appellate Tribunal directed HDFC Bank Ltd., IndusInd Bank Ltd. and ICICI Bank Ltd. to approach the market regulator to secure shares pledged to them by Karvy Stock Broking Ltd.

Banks must approach a whole-time director of the Securities and Exchange Board of India on or before Dec. 6 and the regulator must pass an order before Dec. 12, the SAT said in an oral order.

A bench comprising CKG Nair and MT Joshi, however, rejected the banks' plea to freeze or bring back shares transferred to 83,000 beneficiary accounts. Transfers were done and further rights were created on such shares, making the plea untenable, the appellate tribunal observed.

This order stems from SEBI's Nov 22. order barring Karvy Stock Broking from taking on new clients and dealing with their money for allegedly selling clients' securities and using funds for its own purposes. The markets regulator had also restrained transfer of securities from Karvy Stock Broking's depository participation account with immediate effect, except to those beneficial owners who had made full payments for securities.

Bajaj Finance Ltd. was the first financial institution to move against SEBI order. It had extended loans against securities to Karvy Stock Broking for various working capital requirements, against which the brokerage had pledged shares by giving an undertaking that it owned the securities.

As the market regulator's order changed status quo, Bajaj Finance sought quashing or modification of the order arguing that Karvy Stock Broking had an outstanding obligation of Rs 344 crore towards it and the order “destroyed” its rights to recover such amount.

SAT directed the non-bank lender to approach SEBI's whole-time member for seeking relief while suspending further transfer of shares from Karvy's account. HDFC Bank, ICICI Bank and IndusInd Bank, which had advanced loans to Karvy against pledged shares, too moved the tribunal for similar relief.