The Securities Appellate Tribunal (SAT) on Tuesday asked the National Securities Depository Ltd (NDSL) not to transfer any more shares pledged by Karvy Stock Broking to the original owners as lenders protested against the unilateral transfer of shares by NSDL to the investors.
Issuing an interim stay, a two-member SAT bench said the final order will be issued on Wednesday after the affected lenders, including HDFC Bank, ICICI Bank, IndusInd Bank and Bajaj Finance challenged NSDL’s decision to transfer shares from Karvy Broking back to 83,000 clients, which helped almost 90 per cent of the demat accountholders of brokerage to recover their securities.
The securities which NSDL transferred back to investors were originally pledged by Karvy with banks to raise funds without taking the permission of the owners. As most of the shares were kept as securities for loans given by banks to Karvy, any “unilateral” transfer of shares will have a major impact on their lending business, banks told the SAT.
Karvy had misused securities of over 95,000 clients which it was holding on behalf of the clients to raise over Rs 600 crore in loans. NSDL on Monday transferred back stocks of nearly 83,000 clients. Bajaj Finance was the first to challenge NSDL move at the SAT within hours of the transfers, and the banks joined it on Tuesday.
Banks claimed that such “unilateral” transfer of shares, which are pledged with them as securities for borrowings, will deeply impact the entire business of loans against shares and will prevent them from undertaking this business. They also said they cannot be forced to pay for the “sins” of the regulated companies.
ICICI Bank has the maximum exposure of Rs 875 crore which was created only on October 1, 2019. IndusInd Bank has an exposure of Rs 105 crore, HDFC Bank Rs 195 crore, DCB Bank Rs 55 crore and Axis Bank Rs 85 crore, according to RoC filings.
On Monday, Sebi had directed NSDL to transfer the investors’ securities, held by Karvy Stock Broking in their respective accounts. The decision resulted in nearly 83,000 investors getting back their securities that were illegally transferred by the broker to its own account and were even pledged without any authorisation. With this transfer by NSDL, nearly 90 per cent investors received their securities. Karvy had taken loans to the tune of Rs 600 crore by pledging securities worth over Rs 2,300 crore of 95,000 clients with lenders.
Bajaj Finance moved the tribunal against the Sebi order passed on November 22, which prohibited transfer of securities from Karvy accounts with immediate effect, saying due to this directive the non-banking finance company could not invoke the pledge. The regulator had also barred Karvy from taking new clients in respect of it.
On Monday, the National Stock Exchange and the BSE suspended Karvy Stock Broking’s trading licence for all segments due to non-compliance of the regulatory provisions of the bourses. Sebi also rejected Karvy’s plea to use its clients’ power of attorney (PoA) to settle trades done by them as the broking firm illegally transferred securities worth Rs 2,300 crore of more than 95,000 clients.