Sebi fines HDFC Bank for invoking pledged securities

The Securities and Exchange Board of India (Sebi) has imposed a fine of ₹1 crore on HDFC Bank for invoking securities pledged by BRH Wealth Kreators in violation of the regulator’s interim orders.

The markets regulator in an order issued on Thursday said that the bank had extended loan facility of ₹87.75 crore against shares to BRH and BRH Commodities. However, it invoked securities pledged to the extent of ₹158.68 crore without giving any notice to the clients.

The invocation of pledged client securities was not in conformity with the directions contained in the interim order issued on 7 October 2019, the regulator said. Sebi has, therefore, asked HDFC Bank to deposit an equivalent amount of ₹158.68 crore along with interest from 14 October 2019 till date at the rate of 7% per annum, in a separate interest bearing escrow account, till the settlement of clients’ securities is reconciled.

The interim order against BRH banned the broker from buying or selling any shares from the market and also the bank from selling off the pledged shares. Following this order, HDFC Bank had recalled credit facilities from the borrowers as it had been called upon to honour the bank guarantees it had issued for exchange margin requirements. The Sebi order said that HDFC Bank did not conduct adequate due diligence at the time of creation of pledge and that the bank also invoked the pledge of securities without giving the requisite notice of five days to the clients of BRH, thus depriving them of a fair opportunity to claim back their securities.

However, the bank in its reply to Sebi last year maintained that it is entitled in law to appropriate proceeds from sale of securities for any outstanding of the borrowers concerned, whether the securities were provided for that specific facility or not.

“The bank humbly submits that its actions are in accordance with law … and thus, it would not be correct to state that the same are not in conformity with (the Interim order), whether for the reasons cited in your letter or otherwise. The bank’s act of invoking the securities provided under the overdraft/loan against securities facility for amounts higher than the outstanding under the said facility is in accordance with its right of general lien as afforded under Section 171 of the Contract Act, 1872, which right is expressly reserved in the relevant loan documents executed with BRH and BRH Commodities, respectively, as stated in our letter dated November 7, 2019,” the bank had said in a 14 February letter to Sebi.