Sebi rejects Axis Bank's plea in Karvy Stock Broking matter
The order comes after the Securities Appellate Tribunal (SAT) on December 20 had asked Sebi to pass an order by January 15, 2020 in the case. The tribunal had modified its earlier directive passed on December 17, wherein it had asked the markets watchdog to pass an order within 15 days in the case.
Axis Bank had moved SAT seeking the shares pledged by KSBL to the lender be unfrozen, so that it can invoke the pledges. The move had come following a Sebi directive to the National Securities Depository Ltd (NSDL) in November that prevented Axis Bank from accessing the securities pledged with the lender by KSBL.
KSBL owed Rs 81 crore to the bank which was given in the form of overdraft against shares.
As per the data provided by NSE, securities pledged by KSBL in favour of Axis Bank belonged to its fully paid as well as partly or unpaid clients. The value of securities belonging to fully paid client is Rs 171.74 crore and the value of securities of other than fully paid clients is Rs 13.69 crore.
Regarding pledging of securities of fully paid clients, Sebi said a stock broker has no authority to pledge the securities of its fully paid clients. If a broker pledges securities of its fully paid clients, it amounts to misappropriation of clients' securities.
"Even if securities belonging to fully paid clients are pledged by the stock broker, such pledge does not pass any title to the pledgee, as the stock broker in such case himself/itself does not possess any title/right over such securities. Thus, pledge of securities, belonging to fully paid client, is not treated as valid pledge in law," Sebi noted.
"Pledging of securities of unpaid clients required taking of 'explicit authorization' by the stock broker from each such client and in respect of each such pledging. The Representor (Axis Bank) has submitted that the PoA (power of attorney) given by the client was sufficient authorization to create such a pledge. However, I do not agree with such interpretation given to the scope of PoA," Sebi Whole Time Member Anant Barua said in an order on Tuesday.
He further said PoA given by the client to the broker can be used for the purpose of pledging in favour of the stock broker, "only" for the purposes of meeting the margin requirements.
The bank in its representation to Sebi also said in respect of partly or unpaid clients, KSBL be directed to issue five days notice to the clients or the bank be allowed to issue five days notice to clients to enable the clients redeem the pledged shares by making payment of the corresponding outstanding indebtedness, failing which the lender be permitted to invoke the pledge on shares.
If the bank is able to show proof of authorisation in respect of securities having value of Rs 13.69 crore belong to unpaid clients, such securities can be released to it after following the procedure under supervision of NSE, Axis Bank said in its submission.
The regulator has rejected Axis Bank's plea in the matter.
Sebi, through an interim order passed on November 22, barred KSBL from taking new brokerage clients and also prevented it from using the PoAs given by its clients after the brokerage was found to have allegedly misused clients' securities to the tune of over Rs 2,000 crore.
Securities held by KSBL were used by the brokerage for borrowing from the lenders courtesy the PoA.
The securities held by over 83,000 clients were given back to them after Sebi asked NSDL to do so, forcing lenders -- Bajaj Finance, ICICI Bank, HDFC Bank and IndusInd Bank -- to move SAT and secure an interim relief on further transfers.
However, SAT on December 4 refused any immediate relief to top lenders and directed them to approach Sebi by December 6 and that Sebi pass an order.
NSDL's move helped 90 per cent of KSBL's demat account holders get back their securities.
Later, Sebi refused to provide any relief to the four lenders. SP ANU ANU