Uncertainty Looms for Karvy Lenders as Supreme Court Blocks Immediate Action Against Regulators

Uncertainty Looms for Karvy Lenders as Supreme Court Blocks Immediate Action Against Regulators

The Supreme Court issued an order in the Karvy Stock Broking case, directing that no immediate enforcement action be taken against the Securities and Exchange Board of India (SEBI), National Securities Depository Limited (NSDL), and National Stock Exchange of India Limited (NSE) pending further proceedings.

A three-judge bench comprising Chief Justice DY Chandrachud, Justices JB Pardiwala and Manoj Misra, further directed that the status quo with respect to the shares of Axis Bank be maintained until the next date of hearing, which is January 25, 2024.

The present appeals contest orders issued by the Securities Appellate Tribunal (SAT ) in December last year annulling SEBI orders directed towards certain lenders Axis Bank, ICICI Bank, HDFC Bank, IndusInd Bank and Bajaj Finance, preventing them from revoking shares pledged by Karvy Stock Broking.

After Karvy Stock Broking's default on loan obligations secured by pledged securities, lender institutions were prevented from invoking the pledge due to an intervention by SEBI. Under this order, the pledged shares were transferred to clients of Karvy.

Following lender institutions' appeal to the SAT against SEBI's order blocking them from invoking shares pledged by Karvy Stock Broking, the Tribunal ruled in their favour. SAT directed SEBI, NSDL, and NSE to either restore the pledge within four weeks or compensate the lenders with the full value of the pledged securities with interest.

In a key ruling, the SAT affirmed that a valid pledge establishes a strong third-party right over the secured property. This right shields the property from being liquidated or distributed to satisfy the broker's obligations.

The SAT noted that if SEBI/NSE/NSDL believed the pledge was improperly created by Karvy, the appropriate course of action was to seek rectification of the NCLT register. This procedure was not followed, and NSDL, acting on SEBI's instructions, transferred the pledged shares to Karvy's clients.

Dissatisfied with the SAT order, SEBI and other parties filed an appeal before the Supreme Court of India. The case involves disputed loan obligations exceeding ₹1,400 crore owed by Karvy to lender institutions.

The appellant parties (SEBI, NSDL and NSE) were represented by Senior Advocates Aryama Sundaram, Niranjan Reddy, Arvind Datar, and Neeraj Kishan Kaul. Counsel for the respondents included Senior Advocates Dr. Abhishek Manu Singhvi, Dhruv Mehta, Dr. S Muralidhar, Ritin Rai, and V Giri.