The Bombay High Court had ordered a status quo on a matter related with fixed deposit receipts (FDRs) pledged as collateral by IndiaNivesh Securities Pvt Ltd with Edelweiss Custodial Services Ltd. The HC stated that no party should ask HDFC Bank Ltd, which has issued the FDRs, to liquidate the instrument, valued at Rs100 crore. However, market experts are intrigued at the developments. The market regulator, the National Stock Exchange and the NSE Clearing Corporation are silent about the deal. Since the matter is now under arbitration, nothing will be heard on the issue for at least six months.
Meanwhile, experts are perplexed at implications of the court order as well. Does this mean that all fixed deposit receipts will be treated as negotiable instruments, asks one market expert. "An FD denotes cash in a bank and can only be pledged to the issuing bank, who can adjust it. A third party cannot have any rights on the FD or FDR," he says adding, "Just because it was a commercial practice to accept these FDRs as security or pledge, it does not make the instrument negotiable."
IndiaNivesh, a brokerage firm that has been in business for 14 years voluntarily closed all its businesses, almost overnight in early April after suffering serious losses when stock prices crashed after the first Covid related lockdown. Its exit has left a controversial Rs100 crore hole in the books of Edelweiss Custodial Services, which was its clearing brokerage firm with the trail leading to HDFC bank, which had apparently “funded” a so-called fixed-deposit shown as margin to the NSE clearing house. (
Read: How Serious Is the Issue of Fake Fixed Deposits or Funded Collateral in the Market?)
On 29 April 2020, Edelweiss Custodial Services filed a case in the Bombay High Court to claim outstanding dues by IndiaNivesh Securities, which has closed its business. HDFC Bank is understood to have issued these FDRs as collateral offered by IndiaNivesh and has reportedly refused to pay. Edelweiss Custodial Services claims that these FDRs, worth Rs100 crore, were pledged with it as collateral by the brokerage.
At that time, in a regulatory filing, IndiaNivesh Securities had stated, "During all this turmoil, there has been mark-to-market losses, which have been funded by Edelweiss Custodial Services and Edelweiss Custodial Services was covered with short term loans (STL), which was available for the credit balances of the clients.” It also asked for all its collaterals, including short term loans available with the exchange and the clearing member to be frozen.
HDFC Bank reportedly declined to honour the FDRs issued by it as IndiaNivesh’s collateral pledged with Edelweiss, which was acting as the clearing member.
A
report from the Mint says, "Edelweiss claimed that the FDRs issued by HDFC Bank were pledged by IndiaNivesh as collateral for the entire trade, while HDFC Bank claimed that these were meant only as margin and not for mark-to-market or M2M losses."
While this matter is sub-judice and the HC has asked for a status quo, there are some instances where FDRs would have possibly been used as pledge or collateral.
As
reported by Moneylife earlier, market regulator Securities and Exchange Board of India (SEBI) had been questioning clearing houses about these collaterals.
The Reserve Bank of India (RBI) has also sought SEBI’s cooperation in conducting a specific reconciliation exercise of the margins in the form of lien-marked fixed deposit receipts, bank guarantees, and ‘unfunded fixed deposits’.
