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Latest Judgments Of The Securities Appellate Tribunal (SAT)

Security Appellate Tribunal

Security Appellate Tribunal Case

Case: 1: Karvy Stock Broking Limited (KSBL) v/s NSE India[1]

How not to file an appeal on the SAT?

The case was heard on the maintainability of this appeal against the order/circular of the NSE which suspended the trading account of the appellant.

The said appeal is for the quashment of the impugned order dated 2 Dec 2019 issued by NSE which suspended the operations of KSBL as per the order dated 2 Dec 2019.

The respondent iterated that the appeal is not maintainable on the ground that a different method of seeking remedy is available to the Appellant as per the NSE Rules.

The issue arose on 22nd November wherein the Whole Time Member of the SEBI passed an ex-parte ad-interim order which produced a report as per the findings on the said report the NSE held that the appellant was misusing clients securities.

The WTM of the SEBI issued the following directions:

  • KSBL is prohibited from taking new clients in respect of its stockbroking activities;
  • The Depositories i.e. NSDL and CDSL, in order to prevent further misuse of clients’ securities by KSBL, are hereby directed not to act upon any instruction given by KSBL in pursuance of power of attorney given to KSBL by its clients, with immediate effect;
  • The Depositories shall monitor the movement of securities into and from the DP account of clients of KSBL as DP to ensure that clients’ operations are not affected.
  • The Depositories shall not allow the transfer of securities from DP account no. 11458979, named KARVY STOCK BROKING LTD (BSE) with immediate effect. The transfer of securities from DP account no. 11458979, named KARVY STOCK BROKING LTD (BSE) shall be permitted only to the respective beneficial owner who has paid in full against these securities, under supervision of NSE; and
  • The Depositories and Stock Exchanges shall initiate appropriate disciplinary regulatory proceedings against the Noticee for misuse of clients’ funds and securities as per their respective bye-laws, rules, and regulations;

 As per the above order by the SEBI, the NSE issued a circular and suspended the account of the appellant for the alleged misappropriation against which this appeal is brought before this Tribunal.

The question was raised by the respondent that the appeal is not maintainable on the grounds that, the appellant has an alternate remedy as provided under the rules of NSE through which it can challenge the said order.

The order / circular was issued under Rule 13A.(a) of the rules of NSE  which gives the power to the Managing Director, in case if any proceeding is going against a trading member, it may after recording such reasons order for temporary suspension without notice to the trading member. Under the said rules, Rule 13A(d) which gives a remedial right to the trading member to file an appeal against any the order made under the said rule 13A of the NSE to a relevant authority.

Thus, the issue arose of preferring an appeal through Rule 13A.(d) which is according to the rules framed by a stock exchange or through under Section 23L of the Securities Contracts (Regulation) Act, 1956.

The appellant in support of the maintainability of the appeal opined that the rules framed by the NSE cannot overrule a statutory provision. The appellant also raises that the time spent on the investigation on the alleged offenses and also on the action of WTA, which could itself on the basis of the investigation can issue such order of suspension which shows a method to harass the appellant through multiple litigations.

Upon hearing both the parties the learned Tribunal held, that the appeal is not maintainable. That a stock exchange company has its own rules in compliance with Section 9 of the Securities Contract (Regulation), 1956 which provides an equal statutory remedy for the appellant to appear before a relevant authority against the NSE.

Thus, the Tribunal dismissed the appeal and gave the appellant the liberty to file an appeal as provided under 13A(d) of the NSE Rules to the relevant authority against the said impugned order.

Case 2: Bajaj Finance Ltd. V/s SEBI & Kravy Securities and Brokering Limited

What shall be the right of Pledgee if securities pledged have been withheld by a Regulatory Authority?

The said case is the continuations of the issue raised in the case 1 where the order of 22 November 2019 of the SEBI has been challenged by the appellant/pledgee Bajaj Finance for being held from invoking the securities pledged with the appellant due to the said order of 22 November 2019[2].

As per the order of SEBI whereby, it directed the Depositaries to now allow any transfer of share from the account of Karvy Stock Exchange with immediate effect. Aggrieved by the impugned order of the SEBI the appellant approached this learned Tribunal to quash the ex parte ad interim order on the grounds that no opportunity was given to the appellant against such order and that the order subsists the right of the appellant because it has an outstanding liability of Rs. 3,44,49,81,609/- + applicable interest and other charges. The order, in short, does not allow the appellant to recover its outstanding liability because it prohibited the transfer of securities.

The appellant further pointed out that the order perpetually affected its business activity and SEBI before passing such order have sent notice to the appellant and not providing an equal opportunity to defend. The appellant on becoming aware of the impugned order immediately sent a representation on Nov 23, 2019, despite being a non-working day in SEBI raising all issues. the appellant facing alleged prejudiced by the SEBI seeks to quash the impugned order or a direction to stay on the direction on the transfer of shares which are held as a pledge with the appellant.

The respondent SEBI in defense said that the appellant was not vigilant on contracting such pledge and should have done proper due diligence before entering into a pledge. the respondent also raised the issue that the account concerned is a beneficiary client account and the said order has directed the NSE and NSDL.

The learned tribunal agreed on the assertion made by the appellant that the impugned order was prejudiced to the interest of the appellant, SEBI erred in passing such order without hearing to the parties in the case. The court said the impugned order has prejudiced and adversely affected the rights of the appellant as a Bonafede lender. The court also agreed that by not arraying NSE and NSDL as parties might have brought in more facts on the table, which may impact the maintainability of this appeal.

The learned court directed the Whole Time Member (WTM) of SEBI to decide the representation made by the appellant before 10 December 2019, it also gave liberty to the appellant to produce additional representation before 4 December 2019. Though the court maintained the suspension on the transfer of securities from DP account of Karvy as per the impugned order.

Case 3: HDFC Bank Ltd. V/s SEBI and Others; ICICI Bank Ltd. V/s SEBI and Others; IndusInd Bank Ltd. V/s SEBI and others;  

Can Banks (pledgees) restore their security after the transfer of security to their true owners?

These cases are a continuation of Case 2 of this article, the appellants, in this case, are Banks which are aggrieved by the order dated 22 November 2019 of the SEBI.

The appellants have lent varying amounts of money to Karvy on the basis of pledged securities and their business has been affected by direction no. (vi) of the impugned order which has been mentioned in the above case 2.

The appellant emphasized in Section 12[3] of the Depositories Act, 1996 which deals with pledge or hypothecation of securities. The appellants explained that NSDL has implemented Section 12 in actual practice through certain bylaws and business rules which ultimately explains the fact that the provision is not applicable to the appellants but only to Stock Exchanges, Depositories and other related intermediaries regulated by SEBI, therefore, the mandate of due diligence and compliance with the provision does not fall with the appellants.

They further asserted the fact they bonafide believed that the securities pledged to belong to Karvy since the account was by the name of Karvy Stock Broking Ltd. It now where indicated that it is a client account. Therefore, the Karvy have the rights over the pledged security to transfer and the clients have delegated their right through power of attorney to Karvy. Therefore, as per the provisions in the Depositories Act and regulations related to hypothecation and pledge and the rights of such pledgees those securities should not have been alienated without full determination of facts and ownership rights through an ex parte ad interim order. It also contended that the transfer of securities back to the clients has been done when the matter was pending before this Tribunal, pre-empting the Tribunal action.

The respondent SEBI emphasized upon a SEBI circular dated 20 June 2019 through which a client’s security cannot be pledged by the brokers and was provided with ‘ring-fencing’ of clients’ securities and funds by which brokers were bound to implement it by 31 August 2019. Therefore the appellants were bound to perform their part of due diligence will be taking fresh pledges of securities and lending against them particularly when the account was a “non-house beneficiary” account. It also contended that the rights of pledgee are not above that of the rights of the pledger.

The NSDL and NSE through there counsel represented that the transfer of securities and payments were made to the owners of those securities. The NSDL confirmed full payment to 83862 clients and correspondence of NDSL with WTM of SEBI informing the approval of the Board of Directors of NSDL relating to such transfer was done. All correspondences were of the date 30 November 2019. So NSDL, as directed by WTM or SEBI, were doing their part of diligence and were in consultation with SEBI to affect the transfer of securities to the clients.

The Tribunal held finally that, the view it established from CASE 2 of Bajaj Finance Ltd., cannot be surpassed and the appellants cannot be allowed to have any benefit. It further established that the appellants have acted on the 2nd of December and by that, a lot had happened, whereby NSE and NSDL doing their part of diligence have transferred the securities to the accounts of the 80000 clients. Such prayer for the restoration of transfer of securities back to the accounts and froze them was untenable. Thus, giving no relief to the appellants.

[1] http://sat.gov.in/english/pdf/E2019_JO2019587_1.PDF

[2] https://www.sebi.gov.in/enforcement/orders/nov-2019/ex-parte-ad-interim-order-in-respect-of-karvy-stock-broking-limited_45049.html

[3] https://www.sebi.gov.in/legal/acts/sep-1995/the-depositories-act-1996-as-amended-by-finance-act-2018-_1.html

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