No Coercive Action Against SEBI, NSDL & NSE: Supreme Court Directs In Karvy Stock Broking Case

In appeals filed against Securities Appellate Tribunal's (SAT) quashing of SEBI orders in the Karvy Stock Broking case, the Supreme Court recently directed that no coercive action be taken against SEBI, National Securities Depository Limited (NSDL) and the National Stock Exchange of India Limited (NSE).

A three-Judge Bench of Chief Justice DY Chandrachud, Justices JB Pardiwala and Manoj Misra further directed that status quo be maintained wrt shares of Axis Bank till next date of hearing, i.e. January 25, 2024.

To provide a brief backdrop, the present appeals challenge SAT orders of December last year, whereby the Tribunal quashed orders issued by SEBI against lenders (Axis Bank, ICICI Bank, HDFC Bank, IndusInd Bank and Bajaj Finance), prohibiting them from revoking the shares pledged by Karvy Stock Broking. 

The lender institutions had advanced loans to Karvy against pledged securities, however, Karvy had defaulted. Before the pledge could be invoked, the SEBI had passed an order, under which pledged shares were transferred to clients of Karvy.

On the lender institutions moving the SAT for invocation of pledge, the Tribunal had held in their favor, allowing them to invoke the shares pledged by Karvy. SEBI, NSDL and NSE were directed by the Tribunal to restore the pledge in favor of the lender institutions within 4 weeks, or in the alternative, to compensate them with the value of the underlying securities pledged alongwith interest.

The SAT had observed that once a valid pledge is created in favor of a third party, then a third-party right is created in the attached property, and the same cannot be sold or distributed to discharge the liabilities of the broker.

“If SEBI/NSE/NSDL were of the opinion that the pledge was wrongly created by Karvy... the appropriate remedy was to file an application before the NCLT for rectification of its register. This process was not done and like a highway robber NSDL, through illegal directions from SEBI, transferred the pledged shares to the clients of Karvy,” SAT said in its order.

Aggrieved by SAT's order, SEBI and others approached the Supreme Court. Reportedly, the dues payable to the lender institutions exceed Rs.1400 crores.

Counsels for appellants (SEBI/NSDL/NSE): Senior Advocates Aryama Sundaram, Niranjan Reddy, Arvind P Datar and Neeraj Kishan Kaul

Counsels for respondents: Senior Advocates Dr. Abhishek Manu Singhvi, Dhruv Mehta, Dr. S Muralidhar, Ritin Rai and V Giri

Case Title: Securities and Exchange Board of India v. Axis Bank Limited & Ors., Civil Appeal Nos. 388-92/2024

Click here to read/download order