After the decision, Bajaj Finance, as one of the lenders which had lent Rs 345 crore to Karvy Stock Broking against shares, called loan against shares (LAS) in market parlance, had moved Securities Appellate Tribunal (SAT) to reverse Sebi’s decision relating to return of shares. ICICI Bank that had an outstanding LAS of about Rs 642 crore, HDFC Bank with Rs 208 crore and IndusInd Bank with Rs 159 crore also joined Bajaj Finance with similar pleas.
Sebi whole-time member Anant Barua in the 29-page order noted that all the shares were pledged without the consent of the investors, which was a violation of Sebi laws. The order also pointed out that the lenders, while extending LAS to Karvy Stock Broking failed to notice that the account from which the broker pledged all those shares were not marked ‘proprietary account’ and was marked ‘non-house’ , both Sebi requirements for such pledges.
The account, from which the shares were pledged, was named ‘Karvy Stock Broking (BSE). “The use of ‘(BSE)’, categorisation of account as ‘non-house’ and absence of the word ‘proprietary’ in the account name should have alerted the ( lenders) for taking further precautions,” the Sebi order pointed out.
The order also rubbished the claims of ICICI Bank, HDFC Bank and IndusInd Bank that they, despite being depository participants (DP), were not aware of the categorisation of investor accounts as ‘house’ and ‘non-house’. Bajaj Finance is the only lender among the four that is not a DP. The order also rubbished the claims of the three banks that they were not aware of a Sebi circular dated June 20 2019 that categorically made it mandatory for brokers to segregate shares and securities of their clients and the same of their own. Sebi order also pointed out that the value of shares Karvy Stock Broking had pledged with banks did not match the investments or holdings as shown in its balance sheet. And this should have raised a red flag for the lenders. “In this regard, it is noted a prudent lender always refer to balance sheet for ascertaining the financial position and solvency of the borrower and also the purpose of loan, before lending,” the order pointed out.
The Sebi order also said that the remedy for the four lenders against Karvy Stock Broking should be moved before a civil court.