The Supreme Court on Monday sought response from HDFC Bank in a case related to its invoking of securities pledged by stockbroker BRH Wealth Kreators. A Bench led by Justice SA Nazeer issued notice to the private lender after both Sebi and the National Stock Exchange challenged the Securities Appellate Tribunal’s decision that quashed the Sebi’s January 21, 2021, order that had imposed a 1-crore fine on the private lender for flouting directions passed in its interim order of October 2019. The regulator had also directed HDFC to transfer158.68 crore with a 7% interest per annum into an escrow account till the issue of settlement of clients’ securities was reconciled.
The SAT had on February 18 held that the HDFC Bank was justified in invoking the pledge made by the broker BRH and did not violate any Sebi directions. While Sebi and NSE were represented by attorney general KV Venugopal and senior counsel Shyam Divan, respectively, senior counsel AM Singhvi appeared on behalf of the bank.
Stating that it had all through prohibited creation of charge on client securities, the market regulator said the SAT had grossly erred in law in construing that its various circulars issued from 1993 to 2020, including the two in September 2016 and June 2019, would apply only to the stock broker BRH and not the bank.
Sebi told the SC that the tribunal had failed to consider and appreciate that a pledge created on the securities of investors/clients in favour of the bank was bad in law and against the intent of the Depositories Act, 1996 as well as the Sebi Act 1992 and the circulars issued under them. Sebi had found that BRH had misappropriated its clients securities to the tune of 169.24 crore in September 2019 and misutilised the securities by pledging those for grant of loan facility by the bank to the tune of191.16 crore, Sebi said in its appeal filed through counsel Pratap Venugopal.
“Because in any event, the banks/NBFCs as a pledgee of DMAT securities as well as a prospective transferee on invocation is a “person associated with the securities markets”. It cannot be said that the banks, therefore, are not within the jurisdiction of Sebi, any person dealing with securities, including a person dealing in the depository system by creating a pledge in his favour, is within the Sebi jurisdiction and bound by the Sebi orders,” it added.
BRH had availed a loan against shares from HDFC Bank. The brokerage firm had in October 2019 defaulted on its obligations following which HDFC Bank recalled a loan worth 191 crore. As BRH failed to repay the loan, the private bank sold shares pledged by the broker worth140 crore between October and December 2019. This was despite Sebi in October 2019 restraining BRH and seven other related parties from accessing the securities market and disposing of its assets and NSE suspending BRH from October 1, 2019.
