Respite for SEBI in the Karvy Stock Broking Matter: SC stays SAT order

On Thursday, the Supreme Court issued a stay on the Securities Appellate Tribunal's (SAT) order following a petition filed by the Securities and Exchange Board of India (SEBI) in the Karvy Stock Broking case. The petition challenged SAT's earlier decision that had favored major lenders including Axis Bank, ICICI Bank, HDFC Bank, IndusInd Bank, and Bajaj Finance. SAT had overturned SEBI's directives, instructing the market regulator to either reinstate the pledges made in favor of the lenders or provide compensation. Axis Bank had been fined Rs 5 lakh by the Securities and Exchange Board of India (SEBI) for violating merchant banking norms, as per an order issued by the markets regulator. SEBI conducted an examination of Axis Bank's debt market operations from August 2016 to August 2019 and found the bank to be in breach of Regulation 27 of SEBI (Merchant Bankers) Regulations, 1992. The market regulator revealed that, over a three-year period, while acting as a merchant banker for 22 entities, Axis Bank subscribed to debt papers of nine companies without informing SEBI within the stipulated 15 days from the date of investment, as required by norms. Non-banking finance companies such as Dewan Housing Finance, Indiabulls Housing Finance, Reliance Home Finance, Shriram Transport Finance, ECL Finance, L&T Finance, and Tata Capital Finance were among the entities whose securities Axis Bank acquired while acting as a merchant banker without prior intimation to SEBI. Axis Bank had been granted permission to invoke the shares pledged in its favor. The tribunal instructed SEBI, NSE, and NSDL to reinstate the pledge made in favor of the appellants within four weeks. Alternatively, SEBI, NSE, and NSDL must compensate these lenders with the value of the underlying securities pledged by Karvy Stock Broking, along with interest at 10 percent per annum. SAT had noted that once a valid pledge is established by a broker in favor of the appellants (the five lenders in this case) and they are recorded as beneficial owners, they become the registered owner under Section 10. Consequently, if the broker defaults, the appellant has the right to invoke the pledge under the agreement. If the transfer of securities violated the SCRA or SEBI Act, then the depository has the right to rectify the contravention by submitting an application before the NCLT, the tribunal had stated. SAT had stated that SEBI’s finding that there was a lack of due diligence on the part of the appellants during the creation of the pledge, and they were not entitled to invoke the invalid pledge, is patently erroneous. The bench comprised of D.Y.Chandrachud(Chief Justice), J.B. Pardiwala and Manoj Misra."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.The court is scheduled to hear their plea for an interim stay on Monday. The appellant was represented by Aryama Sundaram, Niranjan Reddy,. Sidharth Sethi, Pulkit Sukhramani, Pulkit Subkhramani, Vidhi Jhawar, Avinash Das, Deepak Anand, Deepak Ananand, Kunal Saini, Zafar Inayat, Arvind P. Datar,. Ms. Surekha Raman. Chaudhary Suraj Surjit, Abhishek Anand. Unnimaya S.. Shreyash Kumar. K J John And Co, Neeraj Kishan Kaul, Indranil Deshmukh, Raunak Dhillon, Drishti Das,. Nihaad Dewan, Angela Dua, Cyril Amarchand Mangaldas Respondent was represented by Abhishek Manu Singhvi, Dhruv Mehta, Sameer Pandit, Aman Raj Gandhi, Krina Gandhi, Parthasarathy Bose, Lakshay Kumar, Shyam Agarwal, Nidhiram Sharma, S. Muralidhar. Mahesh Agarwal, C.d. Mehta, Ankur Saigal, S. Lakshmi Iyer,Sonali Aggarwal, Chirag Nayak, Neville Lashkari,. Anwesha Padhi,E. C. Agrawala,Ritin Rai,. Anannya Ghosh, Dushyant Manocha, Brian Henry Moses, S Muralidhar, Sr. Adv. Mr. Aseem Chaturvedi, Tomu Francis, Trishala Trivedi, Arka Saha, Khaitan & Co. V. Giri,Shally Bhasin, Prateek Gupta, Udbhav Nanda, P. S. Sudheer Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates

Respite for SEBI in the Karvy Stock Broking Matter: SC stays SAT order

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