SAT overturns SEBI order on Karvy

The Securities Appellate Tribunal (SAT) has barred depositories from transferring more securities from Karvy Stock Broking’s (KSB) account while directing SEBI to look into the representation of Bajaj Finance and pass an order by December 10.

The National Securities Depository Ltd. (NSDL) had said on Monday it had transferred the securities of nearly 83,000 clients of KSB from the broking firm’s account to the respective client accounts.

KSB, which is under the regulatory scanner for misusing client funds and has already been barred from signing new clients, had borrowed ₹345 crore from Bajaj Finance, a non-banking financial company (NBFC) by pledging client securities.

The issue came to light on Tuesday after the NBFC filed an appeal with SAT against the order passed by the Securities and Exchange Board of India (SEBI) which, among other things, directed depositories to transfer the shares from KSB’s account to the respective client accounts.

According to the NBFC, KSB had pledged the securities to raise a total of about ₹345 crore but had now violated certain terms of the loan agreement. Hence, the NBFC wanted to invoke the pledge but could not do so due to the SEBI order.

‘SEBI’s unilateral action’

“Such unilateral action by the SEBI has left the appellant to face the consequences of the impugned order [for] no fault of the appellant,” stated the SAT order while highlighting the submissions made by Bajaj Finance.

As per submissions made by the brokerage’s counsel, the brokerage had also given an undertaking that the pledged securities were owned by the broker and were not from client accounts.

According to a stock exchange statement, the current exposure of the NBFC towards KSB is pegged at ₹312 crore. “... we are of the considered view that the impugned order has prejudiced and adversely affected the rights of the appellant as a bonafide lender,” said the SAT order.

The tribunal’s order is bound to affect a few thousand clients of the troubled brokerage. As per the SEBI probe, securities worth approximately ₹2,300 crore of more than 95,000 clients were “unauthorisedly transferred” to the demat account of KSB.

On Monday, the BSE and the National Stock Exchange (NSE) suspended the trading membership of KSB, which means that existing clients of the brokerage will have to transfer their securities to a different brokerage to trade in the stock market.