Financial Liability Looms Over India’s Market Regulator and Stock Infrastructure in Karvy Stock Case

Financial Liability Looms Over India's Market Regulator and Stock Infrastructure in Karvy Stock Case

VoM News Desk | December 21, 2023 | 12:15 PM IST | Breaking News | Follow on Google News

Financial Liability Looms Over India’s Market Regulator and Stock Infrastructure in Karvy Stock Case /Mint

Financial Liability Looms Over India’s Market Regulator and Stock Infrastructure in Karvy Stock Case

India’s National Stock Exchange (NSE) and the National Securities Depository Ltd (NSDL) face a substantial financial liability exceeding Rs1,400 crore following a Securities Appellate Tribunal ruling favoring Karvy Stock Broking Ltd’s lenders.

The Tribunal overturned two Securities and Exchange Board of India (Sebi) orders that dismissed pleas by lenders seeking the restoration of shares pledged by Karvy.

Legal experts anticipate Sebi, NSE, and NSDL may have to repurchase shares from the market at their expense to reinstate the pledge. This case is rare, presenting regulators and market infrastructure intermediaries with such significant financial obligations, noted a lawyer speaking anonymously.

The Tribunal, led by Justice Tarun Agarwala, directed Sebi, NSE, and NSDL to restore the pledged shares in favor of the appellants (banks) within four weeks or alternatively compensate them for the value of the underlying securities with 10% annual interest.

Sebi’s interim order in November 2022 barred Karvy from acquiring new clients and initiated regulatory action against them. It also barred lenders from accessing the pledged shares. Lenders like HDFC Bank, Axis Bank, ICICI Bank, IndusInd Bank, and Bajaj Finance contested Sebi’s directive to return securities held by Karvy to clients.

Sebi alleged Karvy misused client securities by pledging them for loans without disclosing a demat account, borrowing ₹600 crore against securities worth ₹2,300 crore belonging to 95,000 clients.

The Tribunal deemed NSE and NSDL’s actions of removing pledged shares without lender consent as “wholly illegal and without any authority of law,” emphasizing that the shares transferred by NSDL under Sebi’s directions must be restored.

Lenders asserted the pledge was legitimate under Depositories Act and DP regulations, accusing Sebi, NSE, and NSDL of converting them from secured to unsecured creditors by unpledging shares without their approval. They claimed the right to exercise the pledge over the encumbered securities.

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