2020 (1) TMI 708 - AT - SEBI

Pledging of client securities by Karvy by allegedly misutilizing the power of attorney granted by the clients - account frozen explicitly by the WTM of SEBI - appeal filed by Karvy before this Tribunal seeking flexibility in using the power of attorney - maintainability of the appeal - HELD THAT - Preliminary objection regarding maintainability of the appeal is not sustainable since the appellant is an affected party impacted by all the impugned communications/ orders together which the appeal is also challenging. It is a fact that the appellant as a bank has lent funds to Karvy under a permitted Loan against Shares arrangement and under the Depositories Act, rights and sanctity are provided to such pledged accounts. Therefore, the appellant is an affected party is clearly undisputed. It is also a fact that the appellant was not heard either by SEBI or by the Exchanges or Depositories before passing the impugned directions. Though, the account frozen explicitly by the WTM of SEBI by order dated November 22, 2019 is not the same account as that of the appellant implicitly the order has got extended to such accounts because of the sweeping nature of the WTM s directions to protect the interest of the investors. Hence the action by Respondent No. 3 NSDL is also a consequential one as clearly stated in their communication. Though appellant seeks to suggest a solution stating that some of the investors in fact owe dues to Karvy and hence securities to the extent of such dues rightly belonging to Karvy at least could be used by the appellant to invoke the pledge so that at least part of the funds would be available to the appellant. We are not in a position to ascertain the veracity of the information as provided by Karvy to the appellant. Therefore, we direct the appellant to file an appropriate representation before SEBI. If such an application is filed SEBI will hear the appellant and other relevant entities and pass appropriate directions within 15 days from the date of this order. In the interim status quo shall be maintained in respect of the securities in Account No. 19502787 named Karvy Stock Broking Limited- Client Account-NSE CM .

Summary

Issues:
1. Impugned communication by NSDL preventing access to securities pledged by Karvy.
2. Orders passed by SEBI impacting lenders.
3. Appellant's contention of being impacted differently.
4. Appellant's rights over pledged securities.
5. Appellant seeking reliefs and interim measures.
6. Preliminary objection on appeal's maintainability.
7. SEBI's Circulars and actions regarding clients' securities.
8. Forensic Audit status and factual position of securities.
9. Appellant's status as an affected party.
10. Proposal by Karvy for settling dues.
11. Tribunal's decision on maintainability and interim measures.

Detailed Analysis:

1. The appeal challenges the communication by NSDL preventing access to securities pledged by Karvy, along with orders by SEBI impacting lenders. The appellant, a bank, argues its situation differs as NSDL's extension of the order impacted it. The appellant contends it has rights over the pledged securities and seeks reliefs to quash the communication and prevent any restrictions on invoking the pledge.

2. SEBI's orders following NSE's report led to freezing Karvy's accounts, affecting lenders. The appellant, having lent funds to Karvy against securities, faces challenges due to the extended freeze. The Tribunal acknowledges the appellant's status as an affected party and directs them to file a representation before SEBI for a hearing and appropriate directions.

3. SEBI and NSDL cite Circulars regarding clients' securities and the need to protect investors' interests. The Circulars prohibited pledging beyond a specified date, leading to actions against Karvy. SEBI emphasizes the ongoing Forensic Audit to determine the status of securities and the need for caution before releasing them.

4. Karvy proposes a solution to settle dues if allowed to operate accounts and transfer securities rightfully belonging to them. The Tribunal considers the proposal but directs the appellant to engage with SEBI for a resolution, maintaining status quo on the securities in question.

5. The Tribunal dismisses the preliminary objection on appeal's maintainability, recognizing the appellant's status and the impact of the impugned communications. It emphasizes the need for SEBI to hear the appellant and other entities involved before passing any further directions.

6. In conclusion, the Tribunal disposes of the appeal at the admission stage, instructing the appellant to file a representation before SEBI for a hearing within 15 days. It maintains status quo on the securities in the specified account, providing a pathway for resolving the dispute.