2020 (2) TMI 436 - AT - SEBI

Ex parte ad interim order - as directed by WTM of SEBI in the second part of direction no. (iv) the NSDL and NSE were doing their due diligence and in consultation with SEBI effected the transfer of securities to the clients who have paid in full and who were the real beneficial owners of those securities - HELD THAT - No dispute with the interpretations of the provisions of the Depositories Act and Regulations thereunder. However, while dealing with a case of alleged fraud the implications of the same have 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. This ex parte ad interim order was issued on 2019 (12) TMI 477 - SECURITIES APPELLATE TRIBUNAL, MUMBAI . Even an oral mentioning was made by the Appellants before this Tribunal only on December 2, 2019 by which time a lot of water has flown under the bridge. Now it is on record before us that after a due diligence by NSE and NSDL securities have been transferred to the account of the clients. Therefore, further rights have been created/restored involving more than 80,000 investors. In this context, a prayer to recall the same or to retain the same as frozen accounts of those clients becomes untenable. As ordered in the matter of Bajaj Finance Ltd. 2019 (12) TMI 1271 - SECURITIES APPELLATE TRIBUNAL, MUMBAI Appellants are at liberty to approach SEBI. If any representations from the Appellants are pending or filed on or before December 6, 2019 before SEBI, the WTM of SEBI, after providing an opportunity of hearing to the Appellants, shall pass an order in accordance with law latest by December 12, 2019.

Summary

Issues:
Challenging ex-parte ad interim order by SEBI, rights of pledgees in securities, compliance with Depositories Act, forensic audit implications, transfer of securities during pending audit, lenders' due diligence, SEBI circular on clients' securities, ownership of pledged securities, NSDL and NSE verification process, relief sought by appellants.

Analysis:

1. Challenging ex-parte ad interim order: Three appeals were filed against the ex-parte ad interim order dated November 22, 2019 by SEBI in the matter of M/s. Karvy Stock Broking Ltd. The appeals were consolidated due to common issues. The main contention was the transfer of securities from the disputed account back to clients during a pending forensic audit.

2. Rights of pledgees in securities: Appellants, who were banks lending money to Karvy based on pledged securities, argued that under the Depositories Act, pledgees had rights over the pledged securities. They contended that the transfer of securities back to clients without full determination of ownership rights through an ex parte ad interim order was not justified.

3. Compliance with Depositories Act: The appellants emphasized Section 12 of the Depositories Act, 1996, and SEBI regulations regarding pledge or hypothecation of securities. They argued that the lenders acted in good faith based on the securities pledged by Karvy and that the transfer of securities back to clients preempted the tribunal's action.

4. Forensic audit implications: The appellants asserted that the transfer of securities during a pending forensic audit was premature and beyond the provisions of the law. They argued that the ex parte ad interim order should have been used only to disable Karvy from fraudulent activities until the completion of the audit.

5. Lenders' due diligence: SEBI contended that lenders should have revisited their due diligence, especially when dealing with securities pledged by brokers. SEBI's circular emphasized ring-fencing clients' securities and funds, and the rights of the pledgee were not considered superior to the pledger's rights.

6. NSDL and NSE verification process: NSE and NSDL confirmed thorough verification of payment and ownership before transferring securities back to clients. They provided correspondence indicating full payment by clients and approval from NSDL's Board of Directors for such actions.

7. Relief sought by appellants: The tribunal, while acknowledging the interpretations of the Depositories Act, declined to grant further relief beyond the Bajaj Finance Ltd. order. The tribunal highlighted the implications of alleged fraud and the creation of rights for over 80,000 investors due to the transfer of securities. Appellants were advised to approach SEBI for any pending representations.

In conclusion, the appeals were disposed of with no order on costs, and appellants were directed to approach SEBI for further actions in accordance with the law.