Sebi rejects lenders’ plea on client shares pledged by Karvy

Mumbai: The Securities and Exchange Board of India (Sebi) has rejected a plea of lenders seeking depositories to return majority of client shares pledged by Karvy Stock Broking with them. Depositories on instruction from the capital markets regulator had transferred securities worth about ₹2,013.77 crore to 82,559 clients of Karvy Stock Broking whose shares were illegally pledged with these lenders. This represents 87% of the affected clients. The shares transferred belonged to Karvy clients who had fully paid for them but were unlawfully pledged through misuse of the powers of attorney (PoA).

Sebi , in an order late on Friday, said the relief sought by , , and are not tenable and the remedy for them against Karvy Stock Broking should be sought in the civil court.

Earlier this month, Sebi had directed share depositories to transfer majority of the shares owned by clients of Karvy Stock Broking which were pledged with these lenders by the firm back to their demat accounts. The Sebi direction came after the regulator noticed Karvy had misused the power of attorney given to the brokerage by its clients. Following which, Karvy’s lenders had moved the Securities Appellate Tribunal seeking a status quo with regard to the securities in the Karvy Stock Broking account.

“In this case, it has been observed that there was neither any instructions from the clients to Karvy Stock Broking (KSBL) and nor any corresponding trade on the stock exchange. Thus, there was no occasion to use/activate the PoA by KSBL,” Sebi whole-time member Ananta Barua said in his order posted on the website.

The regulator said in one demat account of Karvy Stock Broking, which was not disclosed by it in its filings with stock exchanges, securities worth Rs 2,300 crore of more than 95,000 clients were unauthorizedly transferred into this account by Karvy to generate funds for its group entities.

Karvy’s creditors submitted to Sebi that the pledge created is a valid pledge and the depositories had no right to unilaterally release the pledge without their consent and also to transfer the securities to clients of Karvy Stock Broking.

“In the present case, in respect of impugned securities which have been unauthorizedly removed/transferred by KSBL were belonging to the clients who had paid in full against these securities and there was no further instructions to act upon them. Therefore, KSBL was not at all authorized to pledge securities owned by its fully-paid clients. The unauthorized transfer of securities of fully-paid clients by KSBL is misappropriation of clients’ securities by KSBL,” Sebi said.

“These securities were subsequently unauthorizedly pledged by KSBL to the representors (banks and NBFC) for availing the loans. Thus, the pledge created by KSBL of the securities owned by its clients, was unauthorized, and in law, not treated as a valid pledge,” Sebi said.

The regulator said rules allow only a beneficial owner to create pledge on the securities owned by him.

“…in the present case, securities lying in the demat account... which were unauthorizedly pledged by KSBL with the Representors (lenders), were owned by the clients of KSBL and the clients continued to be entitled to all the benefits attached to such securities in terms of Section 10(3) of the Depositories Act, 1996,” Sebi said.

“These securities were not at all owned by KSBL. Therefore, in terms of the provisions of the Depositories Act, 1996 and DP (Depository Participant) Regulations, KSBL could not have pledged these securities. Accordingly, such unauthorized pledge was not in accordance with law and hence, did not create any right in favour of the Representors (lenders),” Sebi said.