SC rules out coercive action against Sebi, NSDL, NSE in Karvy Stock Broking case

The Apex Court also said that status quo should be maintained in respect of the shares till January 25.

The Supreme Court has directed that no coercive action be taken against the market regulator, the National Securities Depository Limited (NSDL) and the National Stock Exchange (NSE), following the Securities and Appellant Tribunal (SAT) order.

On December 20, 2023, SAT had asked the Securities and Exchange Board of India (Sebi), the depository and the exchange to return the shares pledged by Karvy Stock Broking to the brokerage's lenders or compensate the lenders with the value of the underlying securities along with an interest of 10 percent per annum. The stock broker's lenders - Axis Bank, ICICI Bank, Bajaj Finance, HDFC Bank and IndusInd Bank - had approached the tribunal after the market regulator ordered the return of securities pledged by Karvy back to the client investors.

Also read: Sebi, NSDL and NSE may have to pay over Rs 1,400-cr compensation to Karvy lenders post SAT order

The market regulator had ordered this after finding out that the brokerage had misappropriated clients' funds and pledged their securities with these lenders.

The SAT order had exposed the regulator, the depository and the exchange to a financial liability of over Rs 1,400 crore.

Following this, the market regulator filed an appeal with the Supreme Court. "No coercive steps shall be taken against the Securities and Exchange Board of India, National Securities Depository Limited and the National Stock Exchange of India Limited," the Supreme Court said on January 18.

The Apex Court also said that status quo should be maintained in respect of the shares till January 25.

The background

The lenders had advanced loans to Karvy against shares pledged by the brokerage. When Karvy defaulted, the lenders wanted to invoke the pledge but were stopped by Sebi passing an interim order on September 22, 2019, directing the depositories not to allow the transfer of securities.

Also read: Rumour verification deadline to be extended, still gathering data for delisting norms: Sebi's Buch

On November 22, 2019, the regulator asked the said depositories to transfer the securities except to the beneficial owner (client of Karvy). The lenders made a representation against this order and the regulator, in an order of December 13, 2019, said that the relief sought by the lenders were not tenable and that they should seek a remedy before a civil court of competent jurisdiction.

The lenders then approached SAT.