Relief for Sebi as SC stays SAT order in Karvy Stock Broking case

New Delhi: The Supreme Court on Thursday stayed the Securities Appellate Tribunal's (SAT) order in response to a plea filed by the Securities and Exchange Board of India (Sebi) in the Karvy Stock Broking case.

The plea contested SAT's previous ruling, which had favoured major lenders such as Axis Bank, ICICI Bank, HDFC Bank, IndusInd Bank, and Bajaj Finance. SAT had overturned directives issued by Sebi, instructing the market regulator to either restore the pledges made in favor of the lenders or compensate them.

The court is scheduled to hear their plea for an interim stay on Monday.

The apex court has not issued an interim stay on SAT's order in other appeals challenging the ruling. These appeals include those filed by the National Securities Depository Limited (NSDL) and the National Stock Exchange of India Limited (NSE). 

The court ordered a status quo on shares pledged with Axis Bank and admitted the appeals filed by Sebi, NSE, and NSDL for a final hearing in April.

Sebi and others had challenged a 20 December 2023, order by SAT that instructed the regulator, the depository, and the exchange to either return the shares pledged by Karvy Stock Broking to the brokerage's lenders or compensate them with the value of the underlying securities, along with an interest of 10% per annum within four weeks.

SAT noted in its order that if Sebi and the depository believed the pledge was wrongly created by Karvy, the appropriate remedy was to file an application before the National Company Law Tribunal for rectification of its register.

"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, an action taken without any authority of law," the order stated.

This directive came after Sebi discovered that the brokerage had misappropriated clients' funds and pledged their securities with these lenders. Essentially, Karvy had taken loans of ₹600 crore by pledging securities worth over ₹2,300 crore belonging to 95,000 clients. As per Sebi’s rules, brokers are required to segregate client accounts and broker accounts.

The lenders had provided loans to Karvy against shares pledged by the brokerage. When Karvy defaulted, the lenders sought to invoke the pledge but were halted by Sebi's interim order on 22 September, 2019, directing depositories not to allow the transfer of securities.

On 22 November, 2019, the regulator instructed the depositories to transfer the securities except to the beneficial owner (client of Karvy). The lenders contested this order, and in a decision on 13 December, 2019, Sebi stated that the relief sought by the lenders was not tenable and advised them to seek a remedy before a civil court of competent jurisdiction. Subsequently, the lenders approached SAT.

The total dues payable to Axis Bank, HDFC Bank, ICICI Bank, IndusInd Bank, and Bajaj Finance were over ₹1,400 crore, according to Sebi's order passed in December 2019. Among these, ₹80.64 crore, along with interest, was owed to Axis Bank, ₹642.25 crore to ICICI Bank, ₹344.5 crore to Bajaj Finance, ₹208.5 crore to HDFC Bank, and ₹159 crore to IndusInd Bank.