Sebi rejects Axis Bank's plea in Karvy Stock Broking matter

Markets regulator Sebi has rejected Axis Bank's plea to allow the lender to invoke the pledge on shares in the Karvy Stock Broking Ltd (KSBL) matter.

Axis Bank, later in a statement, said it has filed an appeal before the Securities Appellate Tribunal (SAT) against the order passed by Sebi.

"The SAT has today (Wednesday) granted interim relief to Axis Bank by directing status quo to be maintained on the Sebi order till further hearing of the matter," the bank's spokesperson said.

The Sebi order comes after the SAT on December 20 asked Sebi to pass an order by January 15, 2020 in the case. The tribunal had modified its earlier directive passed on December 17, wherein it had asked the markets watchdog to pass an order within 15 days in the case.

Axis Bank had moved SAT seeking the shares pledged by KSBL to the lender be unfrozen, so that it can invoke the pledges. The move had come following a Sebi directive to the National Securities Depository Ltd (NSDL) in November that prevented Axis Bank from accessing the securities pledged with the lender by KSBL.

KSBL owed Rs 81 crore to the bank which was given in the form of overdraft against shares.

As per the data provided by NSE, securities pledged by KSBL in favour of Axis Bank belonged to its fully paid as well as partly or unpaid clients. The value of securities belonging to fully paid client is Rs 171.74 crore and the value of securities of other than fully paid clients is Rs 13.69 crore.

Regarding pledging of securities of fully paid clients, Sebi said a stock broker has no authority to pledge the securities of its fully paid clients. If a broker pledges securities of its fully paid clients, it amounts to misappropriation of clients' securities.

"Even if securities belonging to fully paid clients are pledged by the stock broker, such pledge does not pass any title to the pledgee, as the stock broker in such case himself/itself does not possess any title/right over such securities. Thus, pledge of securities, belonging to fully paid client, is not treated as valid pledge in law," Sebi noted.

"Pledging of securities of unpaid clients required taking of 'explicit authorization' by the stock broker from each such client and in respect of each such pledging. The Representor (Axis Bank) has submitted that the PoA (power of attorney) given by the client was sufficient authorization to create such a pledge. However, I do not agree with such interpretation given to the scope of PoA," Sebi Whole Time Member Anant Barua said in an order on Tuesday.