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TMI Blog2020 (1) TMI 679X X X X Extracts X X X X X X X X Extracts X X X X ..... ow proof of authorization in respect of securities having value of ₹ 13.69 crores belonging to unpaid clients, such securities can be released to the Representor after following the above procedure under supervision of NSEIL. - WTM/AB/SEBI/MIRSD/HO/42/2019-20 - - - Dated:- 14-1-2020 - Ananta Barua, Member ORDER UNDER SECTIONS 11(1), 11(4) AND 11B OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 - IN THE MATTER OF KARVY STOCK BROKING LIMITED In respect of representation made pursuant to order of Hon'ble SAT, by Axis Bank Limited 1. A communication dated November 23, 2019 was received by Axis Bank Limited (hereinafter referred to as the Representor ) from National Securities Depository Limited (NSDL), a depository registered with SEBI, which inter alia stated as under: Please refer to SEBI Ex Parte-Ad Interim Order bearing ref. no. WTM/AB/SEBI/MIRSD/HO/35/2019 dated November 22, 2019, wherein it appears that Karvy Stock Broking Ltd. (KSBL) misused client securities, pledged the same and generated funds, though it did not have a legal right to do so and in violation of various SEBI circulars and guidelines refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts and circumstances of the case 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 ... 3. In view of the aforesaid order dated December 17, 2019 passed by the Hon'ble SAT in Appeal (L) No. 597 of 2019, an opportunity of hearing was provided to the Representor alongwith other concerned entities like National Stock Exchange of India Limited (NSEIL) (Respondent No. 5 in the Appeal), Karvy Stock Broking Ltd. (KSBL) (Respondent No. 2 in the Appeal), NSDL (Respondent No. 3 in the Appeal) and Central Depositories Services Limited (CDSL) (Respondent NO. 4 in the Appeal), on December 19, 2019. During the hearing, the Representor made the representation dated December 19, 2019. During the said hearing, the representatives of NSDL and NSEIL were present. However, KSBL was not present on the said date of hearing. In view of this, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a stay in respect of transfer of pledged shares. I have perused the said order and on perusal it is noted that in the said order the respondents-defendants, their agents and/or servants have been restrained from any manner whatsoever dealing with, disposing of, transferring, alienating, encumbering or otherwise charging movable/immovable properties described in petition schedules A to E, till the date of next hearing and the matter has been directed to be called on February 04, 2020. Hon'ble DRT has also directed the Respondents/Defendants to deposit sufficient security before DRT within 15 days from the date of the receipt of the order failing which the properties in Schedules shall stand attached. The Representor who is petitioner in the said O.A., subsequent to the above order dated December 31, 2019 of Hon'ble DRT, attended the hearing on January 08, 2020 and made submissions for disposal of its representation dated December 19, 2019 and also filed its written submissions on January 14, 2020 seeking passing of appropriate order by SEBI. The order dated December 31, 2010 passed by Hon'ble DRT does not in any way affect the order of status quo directed by the Hon' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s on date, the principal amount of about ₹ 80.47 crore and interest, cost charges etc. thereon is outstanding and due to the Representor from KSBL. The overdraft facility is claimed to be secured by KSBL by pledging the securities lying in the impugned demat account. It is the case of the Representor that since the pledge was created under the impugned demat account which was identified as Karvy Stock Broking Ltd. - Client Account NSE-CM , hence, the pledge created on the securities lying in such account was in accordance with the provisions of SEBI circular dated September 26, 2016 and was a valid pledge. It has further been argued that such a validly created pledge has not been rendered invalid by SEBI circular dated June 20, 2019 which merely casts obligation on the stock brokers to unpledge all the securities belonging to their client and does not declare pledges so created as invalid. According to the Representor, SEBI circular dated June 20, 2019 did not per se declare the pledge existing on the date of coming into force of the circular, as invalid. More so when the Representor itself brought to the notice of KSBL and SEBI about the compliance with the requirement of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts and circumstances of the present case as in the first instance the clients did not pledge their securities in the impugned demat account in favour of KSBL and nor did KSBL have right/authorization to pledge the securities of client in the impugned demat account, in favour of the Representor. The consequences of accepting the contention of the Representor regarding pledge has been explained in ABN Amro Bank Vs. Indian Railway Finance 1996 85 Comp Cas 689 CLB, as follows: 52. If wrongful pledging of a third party's securities is recognised as valid for the purpose of conveying title, the investors will be in for a raw deal. The securities market being a wide network, it is essential to rely on the services of intermediaries who take upon themselves the responsibility of delivering the scrips or receiving the price. Every such transaction has to be as per the rules of the stock exchange and should be evidenced bya contract note as the brokers being members of the stock exchange are governed by the rules and regulations of the exchange. If such wrongful pledging is recognised, there will be total chaos in the securities market. As such the stock exchange regulat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ptember 18, 2019, has requested KSBL to fund the outstanding amount and unpledge the securities, to ensure compliance with the SEBI circular dated June 20, 2019. 14. From the above, I note that pledging of securities of unpaid clients required taking of explicit authorization by the stock broker from each such client and in respect of each such pledging. The Representor has submitted that the PoA given by the client was sufficient authorization to create such a pledge. However, I do not agree with such interpretation given to the scope of PoA. I note that the scope and ambit of the PoA is laid down in the SEBI's circular dated April 23, 2010 which standardized the requirements pertaining to PoA and inter alia provided as: Relevant Extract of the SEBI's Circular dated April 23, 2010: PoA favouring Stock Brokers PoA executed in favour of a Stock Broker by the client should be limited to the following: 1. Securities i. Transfer of securities held in the beneficial owner account(s) of the client(s) towards stock exchange related margin/delivery obligations arising out of trades executed by the Client(s) on the stock excha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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