According to a report in ‘The Economic Times (ET)’, market regulator Securities and Exchange Board of India (SEBI) and the National Stock Exchange (NSE) have moved the Supreme Court against a Securities Appellate Tribunal (SAT) order which had ruled in favour of HDFC Bank in a prolonged legal dispute over the Bank selling shares pledged with it by broker BRH Wealth Kreators. The news report quoted people with direct knowledge of the matter.
The pledged shares belonged to the broker's clients. SEBI had ruled against the Bank for invoking the pledged shares, but the appellate tribunal overruled the regulator in an order in February this year.
It is understood that while SEBI moved the apex court in mid-April, NSE filed its appeal on 11th May. The Supreme Court on 21st May issued a notice to HDFC Bank seeking its response and, according to the Court's website, the matter is tentatively listed for mid-July.
The matter pertains to BRH Wealth Kreators which had pledged securities belonging to its clients with HDFC Bank to avail loans. BRH defaulted on the loan repayment in October 2019. During the same time, SEBI passed an ex-parte order freezing the assets of BRH since it failed to segregate client securities and pledged them for loans. In the same order dated 7th October 2019, the regulator had also asked exchanges to return the shares belonging to the clients of BRH.
However, between 15th October and 20th October, HDFC Bank invoked the pledge on the collateral shares and sold them in the market for Rs148 crore.
Following this, SEBI issued a show-cause notice to the Bank asking why action should not be taken against it for not complying with its order.
HDFC Bank opposed this show-cause notice, saying SEBI had no jurisdiction over banking-related issues, and that the lender had powers to invoke pledges if a debtor failed to repay its obligations.
According to sources quoted by ET in the news report, the core contention of SEBI and NSE is that the shares pledged by BRH didn't belong to the broker but to the clients and hence HDFC Bank was not supposed to invoke the pledge or sell them. But HDFC Bank is taking a view that the pledge was valid since the depositories showed the beneficial owners of the shares were BRH and, hence, invoking the pledge was justified.
In October 2019 itself, NSE also passed an order against BRH on the lines of the SEBI order. Since HDFC Bank sold the shares, NSE too moved the appellate tribunal alleging violation of security market rules. The tribunal, however, quashed NSE's petition too.
Legal experts suggest that the core contention in the current case is whether SEBI's October 2019 ex-parte order applied to even institutions not regulated by SEBI and that were not mentioned in the order.
The news report also quoted a lawyer who pointed that the order contained directions to exchanges and depositories and did not name HDFC Bank in particular. So, due to this loophole, the private lender argued that the order did not bind on all the constituents dealing with assets of BRH but was just targeted at exchanges and depositories. But SEBI, on the other hand, contends that its order was 'in rem' which means it applied to all the parties involved in the case including banks with whom the pledge was made.
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