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The Securities Appellate Tribunal (SAT) has quashed an order issued by the Securities and Exchange Board of India (Sebi) against HDFC Bank for invoking shares pledged by broker BRH Wealth Advisor.
On January 21, 2021, the market regulator imposed a penalty of Rs 1 crore on the private sector lender for flouting directions passed in an interim order dated October 7, 2019. Sebi also directed HDFC Bank to deposit Rs 159 crore along with 7 per cent interest.
HDFC Bank had challenged the Sebi directions before SAT.
“We are of the opinion that the appellant (HDFC Bank) was justified in invoking the pledge made by the broker BRH. While invoking the pledge the appellants did not violate any direction contained in the ex-parte ad interim order dated October 7, 2019,” SAT held.
The SAT judgement is critical as there are other lenders who have filed appeals in identical cases.
The modus operandi involve brokers pledging shares belonging to their clients to avail loans from banks. While banks argue that they weren’t aware that shares were wrongfully pledged, Sebi is of the view that banks should have done more due diligence.
Legal experts say the regulator could move the Supreme Court against the SAT order.
In this particular case, BRH had availed a loan against shares from HDFC Bank. On October 4, 2019, the brokerage defaulted on its obligations following which HDFC Bank recalled a loan worth Rs 191 crore. As BRH failed to repay the said amount HDFC Bank sold shares pledged by the broker worth Rs 140 crore between October 15, 2019 and December 20, 2019.
The October 7, 2019 order had restrained BRH from accessing the securities market and disposing of its assets.
Sebi held that the pledged shares sold by HDFC Bank was unlawful and against the order passed dated October 7, 2019.
HDFC Bank argued that it was not aware that BRH had wrongfully pledged shares belonging to its clients as it had expressly confirmed that the securities it had offered while availing the loan facilities didn’t belong to its clients. The bank also argued that it wasn’t a party to the ex-parte ad-interim order dated October 7, 2019.
Meanwhile, Sebi argued that its impugned order was also applicable to the assets of BRH which were pledged. The regulator also argued that HDFC Bank did not conduct adequate due diligence to verify the securities pledged in its favour actually belonged to BRH.
Dismissing the argument, SAT said, “It is not the job of the appellant to figure out as to whether the securities are of the broker or of its clients and it is enough for the appellant to be informed by the depository that the securities are in the name of the beneficial owner which in the instant case was the broker BRH. Thus, the finding that the pledge created by the broker was invalid and, consequently, the subsequent invocation by the appellant was also illegal is totally misplaced.”
Market experts said under the earlier share pledging system it was easier for brokers to misuse client securities to avail loan facilities. This was possible as they had the power of attorney (PoA) from clients.
In 2020, Sebi introduced new pledging norms to prevent misuse by such brokers and did away with the concept of PoA.
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