2019 (12) TMI 1271 - AT - SEBI

Infringement of Rights of the appellant as a bonafide lender - Depositories shall not allow transfer of securities from DP account - HELD THAT - The impugned order notes that Karvy had raised funds pledging securities from banks and NBFCs and therefore was aware that rights of those entities would be impacted by the said order. As such, even if they could not be heard while passing the impugned order atleast on their representation they were entitled to be heard. It is on record that the appellant wrote to SEBI on November 23, 2019 (received by SEBI on November 25, 2019, 23rd and 24th being Saturday and Sunday). It is also an undisputed fact that lending against securities is a normal and permitted business activity of banks and NBFCs and SEBI is fully aware of the same. Therefore, we are of the considered view that the impugned order has prejudiced and adversely affected the rights of the appellant as a bonafide lender. Since it is the impugned order which has impacted the rights of the appellant, not arraying NSE and NSDL as parties, though their arraying might have brought in more facts on table, does not impact the maintainability of this appeal. Accordingly, without commenting on the merit of the case, we direct the WTM of SEBI to hear the appellant on the basis of their representation dated November 23, 2019 and / or any other additional representation which they may like to make. If the appellant is desirous to make any additional representation it shall be made latest by December 4, 2019. Thereafter, the WTM of SEBI shall consider the representation(s) of the appellant and, after giving an opportunity for personal hearing, pass an order as per law latest by December 10, 2019

Summary

Issues Involved:
Interpretation of SEBI interim order affecting rights of a NBFC lender against a stockbroking firm's pledged securities.

Analysis:
1. The appeal was filed by a Non-Banking Financial Company (NBFC) against an interim order of SEBI regarding a stockbroking firm. The order prohibited the transfer of securities from the stockbroking firm's account, affecting the NBFC's rights.

2. The NBFC contended that it had a significant outstanding amount against the stockbroking firm, and its rights were impacted by the SEBI order. The NBFC had been lending funds against pledged securities with the belief that the securities were owned by the stockbroking firm and not its clients.

3. The NBFC issued a Loan Recall Notice to the stockbroking firm for the outstanding amount, but due to SEBI's order, it could not invoke the pledge. The NBFC argued that it was not given any opportunity to be heard before the order was passed, leading to severe prejudice to its rights.

4. SEBI, represented by senior counsel, argued that the account in question was a beneficiary client account, and the NBFC had not conducted proper due diligence. SEBI directed the release of shares to beneficial owners but mentioned that NSE and NSDL were not party to the appeal.

5. The Tribunal found that the SEBI order prejudiced the NBFC's rights as a lender. It noted that the NBFC had written to SEBI seeking clarification but received no response. The Tribunal directed SEBI to hear the NBFC's representation and any additional submissions before passing a final order.

6. The Tribunal emphasized that lending against securities was a normal business activity for banks and NBFCs, and SEBI should consider the NBFC's rights as a bonafide lender. It ruled that not including NSE and NSDL as parties did not impact the appeal's maintainability.

7. The Tribunal disposed of the appeal at the admission stage, directing SEBI to hear the NBFC's representation and make a final decision by a specified date. It also suspended further transfers of securities from the stockbroking firm's account until the final decision was made.