The three-member arbitral tribunal has directed Central Depository Services (India) Ltd (CDSL) to reimburse Rs86.02 lakh for the loss suffered by an investor-client of BRH Wealth Kreators Ltd (formerly BMA Wealth Creators Ltd). BRH Wealth Kreators had misused the power of attorney (PoA) after the death of the investor-client's husband and pledged the shares to obtain a loan from HDFC Bank. In the order, the arbitral tribunal also criticised the lethargic approach taken by the Securities and Exchange Board of India (SEBI), National Stock Exchange (NSE) and CDSL for not resolving the grievances of the investor-client in a timely manner.
In an order, the bench of Dr Dilip Virani (presiding arbitrator) and co-arbitrators Ashwin Ankhad and SN Ananthasubramanian says, "...CDSL cannot shy away from its paramount duty of protecting the investor's interest from malpractices such as ones committed by BRH Wealth Kreators. Therefore, we find that there is a dire need for CDSL to put in place an updated mechanism for better surveillance and prevention of mis-utlising securities at such a large scale. CDSL must assure that they conduct sufficient due diligence about the rightful ownership of securities before permitting any creation and invocation of pledge."
"We grant the claim of the claimant to the extent of Rs86,02,768 and direct CDSL to pay the same to the claimant within four weeks from the date of the award, being the value of the claimant's shares on the date of dispute. We also grant post-award simple interest at 9%pa (per annum) on the above amount from the date of this award till full realisation of the combined amount. This interest is granted to the claimant for her inability to utilise the principal amount..." the bench says.
Kheda (Gujarat)-based Daksha Narendra Bhavsar had filed the arbitration application as per orders passed by the securities appellate tribunal on 6 June 2023.
On 31st July and 23 August 2019, BRH Wealth Kreators invoked the PoA signed by Ms Bhavsar and her husband to transfer shares worth Rs94.56 lakh from her demat account to the account of the stock broker without consent. Meanwhile, Mr Bhavsar died on 7 June 2019, much before the PoA was invoked by BRH Wealth Kreators, making Ms Bhavsar the sole holder of the demat account.
After becoming the holder of the shares, BRH Wealth Kreators pledged Ms Bhavsar's shares with HDFC Bank and borrowed money. After BRH Wealth Kreators defaulted, HDFC Bank invoked the pledge and sold Ms Bhavsar's shares in the market to recover its dues.
The bench observed that BRH Wealth Kreators had carried out similar transactions worth over Rs100 crore by invoking securities of other clients by defrauding them.
Aggrieved by the unilateral, non-consensual and fraudulent transfer of shares through misusing PoA by BRH Wealth Kreators, Ms Bhavsar approached CDSL to initiate conciliation or arbitration proceedings. However, CDSL told her that since the securities had been debited based on the PoA, she should approach the police in the case of the unauthorised transfer of shares.
Ms Bhavsar's complaint and her review application were rejected by the NSE. She then filed an appeal before the securities appellate tribunal (SAT) which directed CDSL to initiate arbitration proceedings.
During the hearing, Ms Bhavsar contended that CDSL had acted negligently by not monitoring its record to correctly indicate that she was the beneficial owner of the shares. "Due to CDSL's negligence, HDFC Bank invoked the pledge and sold the shares in the open market as CDSL's records showed BRH Wealth Kreators as the beneficial owner of the shares."
After hearing all parties, the arbitral tribunal observed that while the standard PoA only enables a broker to invoke PoA for meeting margin requirements, in this case, BRH Wealth Kreators, as a broker, appears to have misused the PoA to pledge shares for availing a loan for itself from the bank. "BRH Wealth Kreators, as depository participant (DP) failed to obtain the pledge request from the client before pledging the client's securities as required under SEBI (DP) Regulations and CDSL Bye-Laws. This actually amounts to serious manipulation by DP on its clients."
Further, the bench observed there has been an abject failure of governance both structurally and hierarchically and all attempts are being made to insulate CDSL as a depository from the defaults committed by BRH Wealth Kreators as DP. "The Act makes it abundantly clear that the DP perform their roles as agents of depositories. Strangely, this fact has not been highlighted in the SEBI adjudication order on 24 July 2023, which seems to have adopted a more emphatic view of CDSL's incapacity to monitor BRH Wealth Kreators as DP's actions in the circumstances leading to the creation of the fraudulent pledge," it says.
"It also needs to be mentioned that SEBI has, in the meanwhile, on 24 July 2023, announced an acceptable solution to the matter of loss of securities by identifying the entities from whom the claimant has to seek redressal based on the nature of causes as understood and outlined by SEBI. This has to be seen as SEBI's ardent attempt to bring closure to the matter of claims, which may have been made or are in the process of being made," the arbitral tribunal says.
Coming down heavily on CDSL, the bench says, "It would indeed be a travesty of justice if only NSE, the stock exchanges, where BRH Wealth Kreators was registered as a stockbroker, is made to pay for its lapses (gross misuse of client's PoA for the purpose of pledging securities for availing loan against shares and lack of monitoring on the part of NSE) and CDSL is permitted to take refuge, without sufficient reason, on an extraordinary plea that it cannot be expected to monitor BRH Wealth Kreators as broker's operations as contained in the SEBI adjudication order, especially when BRH Wealth Kreators was also performing the role of DP as its agent."
"Therefore, in furtherance of justice, CDSL deserves to be made to indemnify the claimant for a) its failure to monitor BRH Wealth Kreators as DP's operations in accordance with the Depositories Regulations, CDSL Bye-Laws as one of its AGENTS and its negligence in performing its duty, particularly with reference to tis (its) not obtaining the client's approval or concurrence before making the securities available for pledge and b) its casual conduct in not registering the case for arbitration in question as early as in November 2021 and finally taking steps to appoint this panel only upon the orders of the SAT in June 2023," the bench says.
The arbitral tribunal also criticised SEBI for not issuing timely directions to protect investor clients. It says, "In the instant case as also in similar cases witnessed in the recent past, SEBI seems to have gone all over the place initially before finding its niche after the substantive lapse of critical time. Even though the claimant (Ms Bhavsar) had to go to CDSL and NSE twice only to be rebuffed, it is only after SAT ruled for arbitration that this matter assumed the much-needed seriousness and CDSL initiated arbitration proceedings on June 2023. Perhaps it would have been in the fitness of things if SEBI had, as early as 7 October 2019, issued appropriate directions in this regard so as to protect the interest of the clients of BRH Wealth Kreators as DP whose securities were fraudulently pledged by BRH Wealth Kreators to obtain loan from HDFC Bank."
In February 2021, SAT stayed an order passed by SEBI against HDFC Bank in the BRH case. In January of that year, SEBI had asked the lender to deposit Rs158.68 crore along with interest in an escrow account and pay a penalty of Rs1 crore in this case.
HDFC had granted credit facilities to BRH worth Rs191.16 crore and to BRH Commodities worth Rs26.61 crore, out of which Rs87.75 crore was granted as a loan against securities (LAS). On 14 October 2019, HDFC Bank invoked securities pledged by BRH to the extent of Rs158.68 crore.
Read: SAT Stays SEBI Order against HDFC Bank in BMA Wealth Case
SEBI, in its order on 7 October 2017, had barred BRH Wealth Kreators, Shiv Kumar Damani, Anubhav Bhatter, Murgesh Devashrayi, BRH Commodities, Prosperous Vyapaar Pvt Ltd, Polo-Setco Tie Up Pvt Ltd and Parton Commercial Pvt Ltd from markets.
