SAT slams NSDL as "Highway Robber" acting on Sebi's orders in Karvy ruling

Karvy's lenders--Axis Bank, ICICI Bank, Bajaj Finance, HDFC Bank and IndusInd Bank--had approached the tribunal

In yet another scathing order, the Securities Appellate Tribunal (SAT) has likened the actions of National Securities Depository Ltd. (NSDL) to highway robbery, asserting that these actions were carried out under "illegal directions" from the market regulator. The tribunal's ruling on December 20 favoured the lenders to Karvy Stock Broking (KSBL).

Representing one of the lenders, Sandeep Parekh, founder of Finsec Law Advisors, commented on the "very harsh words" used by SAT against the Securities and Exchange Board of India (SEBI) and NSDL. In a post on X, formerly Twitter, he mentioned that his client successfully reclaimed its money with interest.

An email seeking comments on this matter was sent to spokespeople of SEBI and NSDL. However, immediate responses were not received from either organisation.

Earlier this month, SAT criticised SEBI for its "lackadaisical approach" in unfreezing securities held by the Kirloskar family, stating that the regulator's actions reflected its functioning "in reacting to matters at the last moment."

Subsequently, Madhabi Puri Buch, Chairperson of SEBI, expressed regret over the Kirloskar incident, acknowledging that the regulator takes the SAT rebuke seriously.

Just a month later, SAT issued another cutting remark in the Karvy matter. The tribunal ruled that SEBI, NSDL, and the National Stock Exchange (NSE) should either return the securities pledged by Karvy to the lenders or compensate them along with interest. This ruling could result in a financial liability of over Rs 1,400 crore for the regulator and the regulated entities.

Also read: Sebi, NSDL, NSE may have to pay over Rs 1,400 cr compensation to Karvy lenders

Karvy's lenders, including Axis Bank, ICICI Bank, Bajaj Finance, HDFC Bank, and IndusInd Bank, approached the tribunal after being denied access to securities held in pledge for loans extended to Karvy.

Following an investigation, SEBI found that Karvy had misappropriated client funds and securities, directing NSDL to transfer these securities back to the respective clients. However, Karvy's lenders argued that this violated an SAT order mandating all parties to maintain the status quo on the securities held in a specific depository account.

The SAT order, overturning SEBI's rejection of the lenders' claims, stated, "In our view, if SEBI/NSE/NSDL thought that the pledge was wrongly created by Karvy, the appropriate remedy was for the Depository to file an application before the NCLT (National Company Law Tribunal) for rectification of its register."

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It further added, "This process was not done, and like a highway robber, NSDL, through illegal directions from SEBI, transferred the pledged shares (which were fungible) to the clients of Karvy without any authority of law."

The tribunal concluded that the regulator, depository, and exchange's actions "in not allowing the appellants to revoke the pledge under the Depositories Act and in removing the pledged shares without the appellant's consent were wholly illegal and without any authority of law." It ordered the restitution of the shares removed and transferred by NSDL under SEBI's directions to the lenders.