The tribunal has allowed Axis Bank to invoke the shares pledged in its favour and asked the Securities and Exchange Board of India (Sebi) to restore the pledge in favour of the other banks within four weeks and also compensate them.
“In the alternative SEBI, NSE and NSDL are directed to compensate the appellants (lenders) with the value of the underlined securities pledged in their favour along with interest @ 10% p.a. within the same period,” said the SAT.
Karvy Stock Broking owed these lenders about Rs 1,400 crore, as these banks had extended overdraft facilities against shares to it. However, the shares pledged under the overdraft facility agreement were of clients which had debit balance with Karvy as their stock broker.
Sebi alleged that Karvy Stock Broking had misused its clients’ securities.
The regulator held in its order that the shares pledged by the broking company were invalid and therefore cannot be invoked by the banks.
Although the shares were pledged in favour of the banks, NSDL, without revoking or cancelling the pledge, transferred the pledged shares to the clients of the broker.
“We are further of the opinion that once a valid pledge is created in favour of a third party then a third-party right is created in the attached property and the same cannot be sold or distributed to discharge the liabilities of the broker,” said SAT’s presiding officer justice Tarun Agarwala.
The tribunal said no revocation of pledge is permitted unless consent is obtained from the pledgee, which in this case were the banks. It said the action of Sebi and NSDL to unilaterally transfer pledge shares to the clients of Karvy Stock Broking was wholly illegal and without jurisdiction.
“In our view if SEBI / NSE / NSDL were of the opinion that the pledge was wrongly created by Karvy as it included clients securities who had no debit balance then the appropriate remedy for SEBI or to the depository was that the depository should file an application before the NCLT for rectification of its register,” SAT said. “This process was not done and like a highway robber NSDL through illegal directions from SEBI transferred the pledged shares (which were fungible) to the clients of Karvy which action was without any authority of law.”
