Edelweiss Custodial Services Ltd. has moved the Securities Appellate Tribunal, challenging an order passed by NSE Clearing Ltd. that had directed it to reinstate clients' securities or alternatively provide and retain an appropriate security cover.
Vrise Securities Ltd., a broker member of Edelweiss, had pledged securities worth more than Rs 30 crore and had issued bank guarantees as security for meeting its settlement obligations. Edelweiss invoked the bank guarantees and partly sold off the securities after it discovered that the securities pledged to it belonged to the broker's individual clients. NSE Clearing issued a notice for reinstatement of these securities.
The tribunal directed the custodial services firm to maintain appropriate collateral with NSE Clearing for covering the value of securities and has directed that National Stock Exchange be made a party to the case. It will next hear the matter in March.
Edelweiss' counsel questioned the basis of NSE Clearing's order as well as its jurisdiction, stating that it was rightful owner of securities in accordance with the Depositories Act. Investors, who are clients of Vrise Securities, have sought intervention to recover their securities.
A custodian, as per Indian regulations, can act as clearing member for settlement of securities in the stock markets. A custodian doesn't trade on its own but settles trades on behalf of its clients. A client or broker member must maintain shares as security with a custodian to ensure proper settlement.
Issues Framed By SAT
The SAT has framed the following issues, which will be determined by it after hearing necessary parties to the case.
- Whether NSE's clearing arm has powers under the law to direct reinstatement of securities?
- Edelweiss Custodial Services is a professional clearing member of NSE's Clearing arm. Can the National Stock Exchange exercise jurisdiction even when Edelweiss is not a trading member.
- Can securities sold by Edelweiss Custodial services be reinstated?
Gaurav Joshi, counsel representing Edelweiss Custodial Services, also challenged the intervening applications filed by Vrise Securities' clients, stating that shares, according to the Depository Act, are fungible in nature and individual investors cannot claim damages against the pool of securities sold by it.
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