SAT to decide who owns Karvy’s pledged shares
India’s top two private banks, HDFC Bank Ltd and ICICI Bank Ltd, on Tuesday fought to lay their hands on client shares that Karvy Stock Broking Ltd had pledged with them, seeking to recover ₹1,000 crore they had lent to the brokerage.
The case will require the Securities Appellate Tribunal (SAT) to address a core dilemma: who owns these shares — the client who
bought the shares, or the lender who advanced money against them without verifying their actual ownership?
At Tuesday’s hearing, the lenders sought to quash a 22 November order by the Securities and Exchange Board of India (Sebi), which prevented them from accessing these shares. They also wanted SAT to set aside the
National Securities Depository Ltd’s (NSDL) transfer of these securities to client accounts on Monday. Consequently, they have also made NSDL and the National Stock Exchange parties to the case.
The lenders said in their petitions that following the Sebi order, they had requested the regulator not to initiate any action on transferring these shares to clients as they had bona fide rights to them. The two banks told the tribunal that it was common industry practice to lend against pledged shares (LAS) and there was no reason to suspect Karvy’s claim that it owned these shares.
Sebi’s 22 November order said
Karvy had misused client securities, pledging them to raise money, some of which was transferred to related-party businesses such as Karvy Realty Ltd. SAT will rule on the banks’ petition on Wednesday.
On Tuesday, while ruling on a Bajaj Finance Ltd plea of a similar nature, SAT asked Sebi to hear the lender’s representation and pass appropriate orders by 10 December and put a stop to any more transfer of securities to clients’ accounts. A petition by IndusInd Bank was also merged with the petitions by HDFC Bank and ICICI Bank. The brokerage firm owes the lender ₹132.50 crore against pledged shares.
(Graphic: Sarvesh Kumar Sharma/Mint)
Mint reported on 3 December that NSDL had transferred securities worth ₹2,013.77 crore to the accounts of 83,306 clients. Karvy owes ICICI Bank ₹642 crore and HDFC Bank had granted the brokerage a loan facility of ₹350 crore. Bajaj Finance has an exposure of ₹345 crore.
In its petition, HDFC Bank claimed that following the Sebi direction, the loan which was earlier secured by pledged shares had suddenly become unsecured as it cannot access those shares.
During the course of arguments, the lenders said LAS facilities are a common market practice and are routinely used by brokers for working capital and margin requirements. The lenders said their loan sanction letters specifically stated that pledged shares belonged to Karvy, its group companies or its promoters.
The Sebi counsel, however, said banks should have ascertained the ownership of these shares and conducted better due diligence. Counsel Rafique Dada said banks remained ignorant despite the Sebi circular of June 2019, which ruled that brokers cannot pledge clients’ securities and starting 1 October, brokers had to unwind such pledges.
HDFC Bank, however, countered that since the shares were from Karvy’s account, it believed that the broker was the owner of the securities and “there was no reason to enquire or ascertain whether these securities belonged to Karvy or any of its clients".
ICICI Bank said in its petition that such an order without hearing the bankers is detrimental to its 800,000 public shareholders and banking customers. On 5 November, ICICI Bank had issued a notice to Karvy to return all the loans, failing which it would invoke the pledges for recovery.
The lenders also alleged that Sebi and NSDL did not respond to their requests on transfer of securities to clients’ accounts, which would leave them with almost no shares.
NSDL said that it complied with Sebi’s 22 November directions and transferred securities to the beneficial owners, which are the clients. In fact, the depository conducted a board meeting before taking a call as this was not a routine case, but one of alleged fraud.
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