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TMI Blog2020 (1) TMI 679X X X X Extracts X X X X X X X X Extracts X X X X ..... iate necessary actions to protect the interest of investors, whose shares have been pledged. Accordingly, based on the information provided by NSE, such client securities that appear to be pledged are therefore under a state of abeyance. You may intimate your pledgee client (DP ID: IN300484/Client ID: 10392275) suitably." 2. Aggrieved by the aforesaid communication, the Representor filed an Appeal (L) No. 597 of 2019 - Axis Bank Limited Vs. SEBI & Ors. Before Hon'ble Securities Appellate Tribunal, Mumbai (hereinafter referred to as "Hon'ble SAT") whereby Hon'ble SAT has directed as under: "..................... 11. Having heard the learned counsel for the parties, and having perused the documents, we are of the view that the preliminary objection regarding maintainability of the appeal is not sustainable since the appellant is an affected party impacted by all the impugned communications/orders together which the appeal is also challenging. It is a fact that the appellant as a bank has lent funds to Karvy under a permitted Loan against Shares arrangement and under the Depositories Act, rights and sanctity are provided to such pledged accounts. Therefore, the appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vocates/representatives of NSDL, NSEIL, KSBL and the Representor were present. During the said hearing, the advocate for KSBL undertook that any money that would be received from the clients whose securities were pledged under the demat account no. 19502787 named as "Karvy Stock Broking Ltd. - Client Account NSE-CM" (hereinafter referred to as "impugned demat account"), would be deposited into a no lien escrow bank account to be opened by NSEIL. Further, in the said hearing, NSEIL agreed to share the data in respect of KSBL's clients as on November 22, 2019, whose securities are pledged through the impugned demat account, with the Representor. On the said date, matter was adjourned for further hearing to be held on January 08, 2020. 4. The Representor filed a Miscellaneous Application No. 650 of 2019 in disposed of Appeal (L) No. 597 of 2019 wherein Hon'ble SAT vide its order dated December 20, 2019 while disposing of the miscellaneous application passed the following order: ".....2. On the application of the appellant, and after considering submissions of the parties, we modify our order dated December 17, 2019 to the extent that SEBI will pass appropriate orders on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cember 20, 2019, passed by Hon'ble SAT. Moreover, the Representor itself has requested for passing of appropriate order in its written submissions dated January 14, 2020. 8. The Representor has submitted that the impugned demat account is different from the demat account in respect of which SEBI has issued directions in the interim order, therefore, by issuing communication dated November 23, 2019, NSDL has acted beyond the scope of the order. The Representor has also submitted that unlike the demat account referred to in the interim order dated November 22, 2019 passed by SEBI, the impugned demat account was disclosed to the stock exchanges by KSBL. To deal with this contention of the Representor, it would be appropriate to understand the background in which the letter dated November 23, 2019 appears to have been issued by NSDL. On November 22, 2019, Securities and Exchange Board of India (hereinafter referred to as "SEBI") passed an ex parte ad interim order cum show cause notice dated (hereinafter referred to as "interim order") against KSBL as in the interim report given by NSE in the matter, revealed that in one demat account no. 11458979, named KARVY STOCK BROKING LTD (B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t dependent on the subsisting obligation of the client towards the broker. The Representor has also submitted that KSBL had represented to it that the shares pledged with it by KSBL belonged to its client and the amounts availed under the OAS Facility were less than or equal to the amounts owed by such clients to KSBL. 10. As requested by the Representor during the hearing held on December 20, 2019, NSEIL undertook to provide the data pertaining to fully paid and partly/unpaid clients of KSBL whose securities were lying in the impugned demat account. During the course of hearing held on January 08, 2020, the Representor submitted that the NSEIL has provided it data of securities pledged by KSBL with the Representor with bifurcation in to fully paid and partly/unpaid clients and the Representor has also disputed the correctness of such data. I note that the data of pledged securities provided by NSEIL indicates that securities pledged by KSBL in favour of the Representor belonged to its fully paid as well as partly/unpaid clients. As per NSEIL, the value of the securities belonging to fully paid client is Rs. 171.74 crores and value of the securities of other than fully paid client ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same to themselves " 13. As regards pledging of securities belonging to partly paid/unpaid clients, I note that prior to coming into force of SEBI circular dated June 20, 2019, in terms of SEBI circular dated September 26, 2016, stock broker was entitled to have a lien on client's securities only to the extent of indebtness of the client and the stock broker could pledge securities of indebted clients with the "explicit authorization" of the client and the stock broker was required to maintain records of such authorisation. In this regard, SEBI circular dated September 26, 2016 provides as under: "2.5. As per existing norms, a stock broker is entitled to have a lien on client's securities to the extent of the client's indebtedness to the stock broker and the stock broker may pledge those securities. This pledge can occur only with the explicit authorization of the client and the stock broker needs to maintain records of such authorisation. Pledge of such securities is permitted, only if, the same is done through Depository system in compliance with Regulation 58 of the SEBI (Depositories and Participants) Regulations,1996. To strengthen the existing mechanism, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trail should be available with the Stock Broker for such transactions. iii. To apply for various products like Mutual Funds, Public Issues (shares as well as debentures), rights, offer of shares, tendering shares in open offers etc. pursuant to the instructions of the Client(s). However, a proper audit trail should be maintained by the Stock Broker to prove that the necessary application/act was made/done pursuant to receipt of instruction from Client." 15. The said circular, makes it clear that the PoA given by the client to the broker can be used for the purpose of pledging in favour of the stock broker, "only" for the purposes of meeting the margin requirements. The authorization claimed under said PoA by the Representor is not the "explicit authorization" of the client, as referred to under SEBI circular dated September 26, 2016 and of which record is also required to be maintained by the stock broker of all such authorisations. 16. The Representor, in para 18 (e) of its representation dated December 19, 2019 has prayed that in respect of partly/unpaid clients, KSBL be directed to issue five days notice to the clients or the Representor be allowed to issue 5 days notice to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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