SEBI Asks HDFC Bank to Deposit Rs158.68 Crore in Escrow Account, Pay Penalty of Rs1 Crore for Violating Its Order in BMA Wealth Matter
Moneylife Digital Team 22 January 2021
Coming down heavily on HDFC Bank Ltd for violating its orders, market regulator Securities and Exchange Board of India (SEBI) has asked the lender to deposit Rs158.68 crore along with interest in an escrow account and pay a penalty of Rs1 crore. SEBI found HDFC Bank violated its interim order and unilaterally invoked securities pledged by BRH Wealth Kreators Ltd (BRH) (formerly BMA Wealth Creators Ltd) and BRH Commodities Private Ltd (formerly BMA Commodities Pvt Ltd), worth Rs158.68 crore.
In the order, G Mahalingam, whole time member (WTM) of SEBI says, "Given the unilateral action of HDFC Bank to avoid SEBI’s interim order, I am of the view that the alleged violations of SEBI circulars as also the failure to conduct due diligence by HDFC Bank to verify the ownership of securities pledged at the time of creation of the pledge, are not relevant for consideration at this point in time. As stated earlier, the validity of the pledge at the time of creation does not justify the subsequent act of invocation by HDFC Bank on 14 October 2019, post the interim order."
"I find the invocation of pledge of client securities available in the two demat accounts of BRH by HDFC Bank, was not in conformity with the directions contained in the interim order. I find that HDFC Bank had unilaterally invoked securities pledged by BRH to the extent of Rs158.68 crore. I am therefore, of the considered view that HDFC Bank be directed to deposit an equivalent amount of Rs158.68 crore along with interest from 14 October 2019 till date, at the rate of 7% per annum (being the marginal cost of funds based lending rate (MCLR) notified by the Reserve Bank of India-RBI) in a separate interest bearing escrow account (in any nationalised bank by marking a lien in favour of SEBI), till the issue of settlement of clients’ securities is reconciled," the order says.
HDFC Bank has been also asked to keep RBI informed about the action taken by SEBI.
In its regulatory filing, HDFC Bank says it is reviewing the SEBI order for considering future course of action.
SEBI in its order on 7 October 2017 had barred BRH Wealth Kreators (formerly BMA Wealth), 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.
However, on 7 November 2019, HDFC Bank informed SEBI about recalling its credit facilities from BRH and BRH Commodities. HDFC Bank says it had granted credit facilities to BRH and BRH Commodities aggregating to Rs191.16 crore and Rs26.61 crore, respectively.
Responding to this, SEBI told HDFC Bank that the lender's action is against the directions given by the market regulator under its interim order. "It is observed from your letter that HDFC had granted overdraft or loan against securities (LAS) for Rs87.75 crore. However, it is observed from the information provided by National Stock Exchange (NSE) that the HDFC Bank has invoked securities pledged by BRH to the tune of Rs158.7 crore as on 14 October 2019," SEBI says.
On 2 January 2020, SEBI confirmed its direction given in the interim order issued on 7 October 2017.
In a letter on 14 February 2020, HDFC Bank contended that its action are in accordance with law and thus it would not be correct to state that the same are not in conformity with the interim order issued by SEBI. 
"The Bank’s act of invoking the securities provided under the OD or LAS facility for amounts higher than the outstanding under the said facility is in accordance with its right of general lien as afforded under Section 171 of the Contract Act, 1872, which right is expressly reserved in the relevant loan documents executed with BRH and BRH Commodities, respectively, as stated in our letter dated 7 November 2019. The Bank is thus fully entitled in law to appropriate proceeds from sale of the securities for any outstanding of the concerned Borrowers, whether the securities were provided for that specific facility or not," HDFC Bank told SEBI.
On 19 March 2020, SEBI issued a show cause notice (SCN) to HDFC Bank for non–compliance with its directions in the interim order through invocation of pledge of securities. 
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 LAS. On 14 October 2019, HDFC Bank invoked securities pledged by BRH to the extent of Rs158.68 Crore. "The aforementioned invocation of pledge of client securities available in the two demat accounts of BRH, by HDFC Bank, was allegedly not in conformity with the directions contained in the interim order," the SCN says.
Responding to the SCN, HDFC Bank contended that its action of revoking pledged securities are more to do with its regular banking business and SEBI has no jurisdiction over the transactions.
It further submitted, "NSE and Central Depository Services Ltd (CDSL) have permitted creation of pledges as late as 27 September 2019 without objection. In fact, not only did CDSL, who was covered by SEBI’s circulars and the interim order, record the pledge in favour of HDFC Bank but allowed it to invoke the said pledge after the interim order and even sell the pledged securities further. The aforesaid clearly shows that the pledge was validly created and invocation of such pledge was not in contravention of interim order."
During the hearing Mr Mahalingam, WTM of SEBI pointed out that HDFC Bank is also covered in interim order issued by the market regulator. He says, "...the expression 'assets of the noticees' at paragraph 9(v) of the interim order would extend to all properties of BRH including securities that were pledged by it against which funds were raised from HDFC Bank, Bajaj Finance Ltd and JM Financial Products Ltd. It is pertinent to note that the interim order had quantified the outstanding loans of HDFC Bank at paragraph 7F therein." 
"When a loan outstanding of a broker is adjusted against the pledged securities belonging to its clients, it is the broker which gets benefitted as it reduces its liability. Such a reduction of the broker’s liability is at the cost of its clients. It is relevant to emphasise that the underlying object of the interim order was to protect the securities belonging to the clients and in case of shortfall, to utilise other assets of the stock broker to meet claims of its clients. Thus, the impact of the interim order was to impose an immediate freeze inter alia on the assets of the stock broker, in whatever form it was and wherever it was situated irrespective of who was in possession of such assets," the WTM says. 
Further, Mr Mahalingam pointed out that vide the directions at paragraphs 9(vi) and 9(vii) of the interim order, the depositories and banks were directed not to make debits from the demat accounts or bank accounts of BRH. 
He says, "...the act of invocation of the pledge by HDFC Bank avoiding the interim order without paying deference to the restrictions imposed on the assets of the stock broker, is against the settled position in law...If HDFC Bank's right to recover its dues from BRH was affected on account of the interim order, it could have approached a court or forum of competent jurisdiction before such conscious avoidance of the said order. The right to challenge such orders by an 'affected party' in an appropriate forum is always available under the statute. In any case, HDFC Bank could not have unilaterally chosen to ignore the directions contained in the order of a regulator and proceed with its recovery, claiming to have been guided by an independent ‘legal opinion’."
While asking HDFC Bank to deposit Rs158.68 crore along with an interest at 7% from 14 October 2017 till date, the WTM of SEBI asked the lender to pay a penalty of Rs1 crore within 45 days. 
Besides HDFC Bank is also asked to keep RBI informed about its order, place copy of its order before the bank's board and disclose the order on its website.
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