Karvy case: SAT quashes SEBI orders; relief to Axis Bank, other lenders

Securities Appellate Tribunal (SAT) has quashed two separate orders issued by capital markets regulator SEBI (Securities and Exchange Board of India) against private lenders Axis Bank, HDFC Bank, ICICI Bank, IndusInd Bank and Bajaj Finance, which restricted them from revoking the shares pledged by embattled firm Karvy Stock Broking.

In 2019, after finding out about the “misuse of client funds” by Karvy Stock Broking, SEBI issued an interim order prohibiting it from taking new clients in respect of its stock broking activities. Based on the SEBI order, the National Securities Depositories Ltd (NSDL) on November 23, 2019, told the lenders the client securities pledged would remain in "abeyance". The overall securities pledged by the broking company stood at ₹2,300 crore.

"In view of the aforesaid, the impugned orders dated January 14, 2020, and December 13, 2019, are quashed," the orders passed on Wednesday by Justice Tarun Agarwala, presiding officer, SAT says, allowing Axis Bank to invoke the shares pledged.

"A direction is given to SEBI, NSE and NSDL to restore the pledge which was made in favour of the appellants within four weeks from today," the order reads while asking these institutions to compensate other banks with the value of the underlined securities pledged along with 10% p.a. interest.

The SAT order shows as of December 7, 2019, Axis Bank owed an aggregate amount of ₹80.64 crore along with interest to Axis Bank; ₹642.25 crore to ICICI Bank; ₹344 crore to Bajaj Finance; ₹208.5 crore to HDFC Bank; and ₹159 crore to IndusInd Bank.

A total of five appeals had been filed against two orders passed by SEBI, rejecting the representation from accessing the securities pledged with the appellants.

SEBI had earlier rejected Axis Bank's representation to invoke the shares in 2020, saying the securities pledged by Karvy were "invalid", and therefore could not be invoked.

The appeals filed by ICICI Bank, HDFC Bank, IndusInd Bank and Bajaj Finance Ltd. were also found against the order on December 13, 2019, wherein under similar circumstances the representation of the said appellants was rejected.

These appellants filed appeals before the tribunal, seeking relief to invoke the pledge pursuant to the default committed by Karvy.

The SEBI in June this year had also cancelled the certificate of registration of fraud-hit brokerage Karvy Stock Broking for misappropriating clients' funds. The decision came a month after the regulator banned it and its promoter Comandur Parthasarathy from the securities market for 7 years. It also fined them a penalty of ₹21 crore for misusing powers.

The market regulator said irrespective of the cancellation of the certificate of registration, Karvy would continue to be liable for "anything done or omitted to be done as a stock broker", and would be responsible for payment of outstanding fees and dues to the regulator.

SEBI said Karvy had not settled funds to the extent of ₹527.18 crore and securities worth ₹2,862.05 crore, which was returnable to its clients.