SAT quashes NSE's directive to Axis Bank in Karvy Stock Broking case

Photo: Bloomberg

In a relief to Axis Bank, the Securities Appellate Tribunal (SAT) has quashed a direction issued by NSE that funds lying in the bank account of Karvy Stock Broking are the assets of the exchange's defaulter committee.

The order came after Axis Bank challenged the communication issued on December 8, 2020 by NSE holding that the bank accounts of Karvy become the assets of the defaulter committee of the exchange since the stock broker has been declared a defaulter and expelled from the membership of the bourse.

Axis Bank challenged the communication on the ground that the exchange has no power to issue any directions to the bank to freeze its accounts on which the lender has a banker's lien.

It also contended that Axis Bank is a commercial bank and not a trading member and therefore is not bound by Sebi laws, including the bye laws of the National Stock Exchange of India Ltd (NSE).

"We are of the opinion that respondent no.1 (NSE) had no jurisdiction to hold that the funds lying in the account of Karvy Stock Broking Ltd are assets of the committee as per...NSE bye laws," SAT said in an order on Monday.

Citing NSE bye laws, the tribunal said the vesting of the assets in the defaulters committee is limited and cannot include all the assets of Karvy, the defaulter. Only such security deposited with the stock exchange vests with the defaulters committee.

In addition, other monies, securities and other assets due, payable or deliverable to the defaulter by any other trading member also vest with the defaulters committee, it added.

"The bye law 12 makes it apparently clear that a defaulter committee can only issue directions against the trading member and cannot issue any direction to a third party, namely, the appellant (Axis Bank) who admittedly is not a trading member," SAT noted.

It further said NSE does not get any jurisdiction to pass such order based on Sebi's confirmatory order.

The confirmatory order asked NSE to initiate appropriate action against Karvy for violation of its bye laws. It also allowed the exchange to invite and deal with claims of the clients in accordance with its bye law, the tribunal noted.

"The impugned communication issued by NSE dated 8th December, 2020 invoking bye law 11 of its bye laws is totally without jurisdiction and is quashed," SAT said.

It was alleged that in the course of its banking business, Axis Bank had granted several credit facilities to Karvy, which owed Rs 165 crore alongwith interest to the lender.

Also, it is alleged that on January 27, 2021, Axis Bank had Rs 8.27 crore in the bank account and fixed deposit accounts of the lender. Of the Rs 8.27 crore, a sum of Rs 7.98 crore was the exclusive property of Karvy and the balance amount of Rs 28.66 lakh belonged to clients and other parties.

Sebi, through an interim order in November 2019, put several restrictions on Karvy, including prohibiting the brokerage from taking new clients in respect of its stock broking activities as it had misused clients' securities by unauthorisedly pledging the securities.

Among others, the regulator had directed the stock exchange to initiate appropriate action against Karvy for violation of bye laws. This order was confirmed by the regulator in November 2020.

Further, Karvy was declared a defaulter in November 2020 under the bye laws of NSE and was accordingly dismissed from the membership of the exchange as a trading member.

(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

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