The Securities Appeals Tribunal (SAT) overturned orders made by the National Stock Exchange (NSE) and Central Depository Services (CDSL) ordering Kotak Mahindra Bank not to invoke shares pledged by Arcadia Share & Stock Brokers.
In February 2021, the NSE had blocked the private sector lender from invoking and selling securities pledged by the brokerage until the rightful ownership of the securities was established. CDSL then implemented a debit freeze, prohibiting Kotak Mahindra Bank from invoking the pledged shares and recovering its dues. The bank then moved SAT, challenging this.
In its order, the SAT said: “We are of the view that the Respondent (NSE) as an exchange has jurisdiction only against its trading members and cannot give instructions to any other entity, including the caller (Kotak Mahindra Bank) who is not the merchant member. Similarly, the custodian also cannot issue instructions against any other entity that is not within its jurisdiction or freeze the securities that have been pledged in favor of the appellant Custodians can take action against exchange defaulters and freeze the defaulters’ assets up to the unencumbered assets.
In March 2018, Arcadia received a loan from Kotak Mahindra Bank by pledging shares. In its agreement with the bank, Arcadia had expressly declared that it was the legal owner and beneficial owner of the securities and that they were not encumbered in any way.
Around December 2020, Arcadia began to default on its repayment obligations, following which Kotak Mahindra Bank recalled the loan facility on February 15, 2021 and informed the broker that it would enforce the pledged securities.
In the meantime, the NSE issued an order on February 4, 2021, advising Kotak Mahindra Bank not to invoke the pledged securities until their ownership has been established in the securities dealers’ demat accounts. movables. The move came amid allegations that Arcadia wrongly pledged its client securities to lenders to qualify for loans.
Kotak Mahindra Bank’s legal advisers had argued before the SAT that the NSE had no jurisdiction to prevent it from relying on its pledge because it was not a commercial member and therefore was not bound by NSE rules. On the other hand, the lawyer for the NSE argued that it had the power to bring an action to protect the interests of the investors.
Meanwhile, a forensic report had revealed that the clients’ securities were indeed illegally pledged by the broker. However, the court held that the NSE and CDSL had no power to give instructions to a non-trading member.
Previously, the SAT had issued similar orders against HDFC Bank and Axis Bank, siding with the lenders in the illegal share pledge cases.
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