The Supreme Court on Monday upheld the order of the Securities Appellate Tribunal (SAT) that had quashed a direction issued by the National Stock Exchange of India to Axis Bank that funds lying in the bank account of Karvy Stock Broking are assets of the exchange’s defaulter committee.
A bench led by Justice LN Rao after hearing both the sides rejected the NSE’s appeal against the SAT’s November 29 order.
The NSE said the rights/interests of investors/clients of a defaulter trading member, guaranteed under the regulatory framework of Sebi and NSE, supersede the purported right of lien of a commercial bank over the accounts of such trading member.
If the SAT’s order is followed, miscreant trading members would take undue advantage and would devise ingenious ways of removing the innocent investors’ securities and any monies received from misutilisation of such securities out of the hands and reach of the defaulter committee and other trading members, senior counsel Mukul Rohatgi, appearing for NSE, argued. Such restricted interpretation would undoubtedly not only render NSE’s byelaws redundant but also deprive the defaulters’ committee, and in turn, the investors of their dues and rights, thereby defeating the purpose of the NSE byelaws, he added.
Sebi had in November 2019 put various restrictions on Karvy, including prohibiting it from taking new clients in respect of its stock broking activities as it had misused clients’ securities by unauthorisedly pledging the securities.
Axis Bank had challenged the communication issued on December 8, 2020 by the exchange holding that the bank accounts of Karvy become the assets of the defaulter committee of the exchange since the stock broker has been declared a defaulter and expelled from the membership of the bourse.
Senior counsel Shyam Divan and counsel Ankul Saigal, appearing for the bank, argued that Karvy owed it Rs 165 crore with interest and the NSE had no power to issue any directions to the bank to freeze its accounts on which the lender had a banker’s lien.
The counsel also contended that Axis Bank is a commercial bank and not a trading member and therefore is not bound by Sebi laws, including the bye laws of the NSE.
Stating that NSE did not have any jurisdiction to pass such order based on Sebi’s confirmatory order, the SAT had ruled that the exchange could not have held that the funds lying in the account of Karvy Stock Broking are assets of the committee as per the NSE bye laws. Besides, the vesting of the assets in the defaulters committee is limited and cannot include all the assets of Karvy, the defaulter, the tribunal said, adding that only such security deposited with the stock exchange vests with the defaulters committee. In addition, other monies, securities and other assets due, payable or deliverable to the defaulter by any other trading member also vest with the defaulters committee, it added.
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