The Securities Appellate Tribunal (SAT) on Wednesday denied any relief to private-sector lenders HDFC Bank, IndusInd Bank and ICICI Bank, which had moved it after the client securities that Karvy Stock Broking had pledged by misusing powers of attorney were restored to affected clients.
The two-member bench chaired by C K G Nair and Justice M T Joshi said that appellants' plea to recall the shares transferred to close to 83,000 of Karvy's clients or to freeze these securities was "untenable".
"... without going into the merit of the case, we are of the considered view that beyond the directions passed in our order of Bajaj Finance no further relief can be granted at this stage," the bench said.
While not disputing the provisions of Depositories Act that were cited by lenders in their arguments, the bench said that in the case of alleged fraud, its implications also need to be factored in.
"The very purpose of an ex parte ad interim order is to deal with the eventualities arising from such alleged fraud or similar major violations," the bench said in its remarks.
The bench also rapped appellants for approaching the tribunal on December 2 when the Sebi order was passed on November 22. It observed that "a lot of water has flowed under the bridge" during this time.
However, appellants were at "liberty" to approach Sebi. They could approach the market watchdog by December 6 if they wished to make any further representations. The whole-time member of Sebi would pass order by December 12 after giving an opportunity to appellants to present pleas.
On Monday, National Securities Depository (NSDL) said that it had transferred shares of 82,559 (87 per cent) of Karvy’s clients who didn't have any outstanding dues.
Following the move, Bajaj Finance was first to file its appeal before SAT. On Tuesday, HDFC Bank, ICICI Bank and IndusInd Bank moved SAT. Cumulatively, these four lenders are estimated to have extended loans to Karvy Stock Broking against collateral worth Rs 1,400 crore in shares.
Lawyers arguing on behalf of the lenders questioned NSDL’s decision to reverse the pledged shares back to clients, stating that the Sebi's interim order on November 22 was aimed at keeping the status quo.
Lawyers arguing on behalf of NSDL said that Sebi’s June circular had already directed brokers to remove all client securities from pledge. This should have served as notice to lenders exposed to Karvy and the former should have appropriately questioned broker on quality of underlying collateral.
While no fresh relief was granted by SAT to the banks, further transfer of shares from Karvy Stock Broking's Demat account has been put on hold by SAT after hearing the plea made by Bajaj Finance.