Bombay High Court
Karvy Stock Broking Limited vs National Securities Depository ... on 18 March, 2021
Equivalent citations: AIRONLINE 2021 BOM 3150
Author: Madhav Jamdar
Bench: A. A. Sayed, Madhav Jamdar
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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
WRIT PETITION (L) NO.5981 OF 2021
Karvy Stock Broking Limited ...Petitioner
V/s.
National Securities Depository Limited & Ors. ...Respondents
...
Mr. Vikram Nankani, Senior Counsel a/w. Vinay Chauhan, Harish
Khedkar, Ms. Neha Sonawane, Ms. Dhwani Shah and Yash Kullarwar
i/b M/s. Vis Legis Law Practise for the Petitioner.
Mr. Somasekhar Sundaresan a/w Ms. Aakanksha Saxena, Ms. Etika
Srivastava i/b. M/s. Rashmikant And Partners for the Respondent
No.1.
Mr. Zal Andhayarujina, Senior Counsel a/w. Mr. Kunal Dwarkadas,
Mr. Rahul Dwarkadas, Ms. Silpa Nair, Ms. Juhi Bahirwani, Mr. Rahil
Shah i/b. M/s Veritas Legal for the Respondent No. 2.
Mr. Virag Tulzapurkar, Senior Counsel with Mr. Sachin Chandarana,
Mr. Rashid Boatwala and Mr. Pruthvi Dhinoja i/b Manilal Kher Ambalal
& Co. for Respondent No.3.
Mr. Sagar Divekar a/w. Mr. Abhimanyu Mhapankar, Mr. Pratik Ingle for
the Respondent No. 4.
Pratham Masurekar a/w. Aditya Shah i/b. R. V. Legal for the
Respondent No. 5.
Mr. Mustafa Doctor, Senior Counsel a/w. Nimay Dave a/w. Aparna
Wagle & Yash Garach i/b. Alliance Law for the Respondent No.6.
Mr. Vaibhav Charalwar i/b. Sandeep Maurya for the Respondent No.
7.
CORAM : A. A. SAYED &
MADHAV JAMDAR, JJ
DATED : 18 MARCH 2021
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P.C.:
The Writ Petition is fled by the Petitioner seeking the
following reliefs:
a. That this Hon'ble Court be pleased to declare
the Sale and/or auction of the Demat and Trading
Accounts by Respondent No. 1 to 5 unconstitutional
and ultravires Article 14, Article 21 and Article 300A of
the Constitution of Indian and/or the Depositories Act,
1996 and/or the SEBI Act, 1992 and/or Securities
Contract (Regulation) Act, 1956.
b. That this Hon'ble Court be pleased to issue a
writ of certiorari or a writ in the nature of certiorari or
any other appropriate writ, order or direction under
Article 226 of the Constitution of India calling for the
complete information concerning the bidding process
conducted by the Respondent Nos. 1 to 5 be pleased
to quash and set aside the sale and/or transfer the
Petitioner's DP and Trading Account to Respondent
Nos. 6 to 7 respectively and thereby conducting an
enquiry for the same.
c. That this Hon'ble Court be pleased to issue a
writ of prohibition or a writ in the nature of prohibition
or any other appropriate writ, order or direction under
Article 226 of the Constitution of India restraining
Respondent Nos. 1 to 5 from selling and/or disposing
of and/or transferring and/or completing or confrming
the process of selling/disposing of/transferring the
Demat and Trading Accounts of the Petitioner to
Respondent Nos. 6 & 7.
d. That pending the hearing and fnal disposal of
this petition, this Hon'ble Court to restrain Respondent
Nos. 1 to 5 from selling and/or disposing of and/or
transferring and/or completing or confrming the
process of selling/disposing of/transferring the Demat
and Trading Accounts of the Petitioner to Respondent
Nos. 6 & 7.
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2. The Petitioner - Karvy Stock Broking Limited (KSBL) is a stock
broker and registered with the Security Exchange Board of India
(SEBI) and was a member registered with the National Stock
Exchange (NSE), the Bombay Stock Exchange (BSE) and the
Metropolis Stock Exchange India Ltd (MSEIL). The KSBL is also
registered as a Depository Participant (DP) and was a member with
the National Securities Depository Limited (NSDL) and Central
Depository Securities Limited (CDSL).
3. Based on an audit and inspection conducted from 1 st January,
2019, NSE prepared a Preliminary Report and submitted the same to
SEBI on 22nd November, 2019. It was found that KSBL had
pledged/misused its clients' securities and also misused the Power
of Attorneys (POAs) given to KSBL by its clients (BOs-Benefcial
Owners). On 22nd November, 2019, SEBI passed an ex-parte ad-
interim order against KSBL in the following terms:
a. KSBL is prohibited from taking new clients in
respect of its Stock Broking activities;
b. The Depositories i.e. NSDL and CDSL in order to
prevent further misuse of clients securities by KSBL,
are hereby directed not to act upon any instructions
given by KSBL in pursuance of power of attorney given
to KSBL by its clients, with immediate efect;
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c. The Depositories shall monitor the movement of
securities into and from DP account of clients of KSBL
as DP to ensure that clients' operations are not
afected;
d. The Depositories shall not allow transfer of
securities from DP Account No. 11458979, name
KARVY STOCK BROKING LTD. (BSE) with immediate
efect. The transfer of securities from DP Account No.
11458978 named KARVY STOCK BROKING LTD. (BSE)
shall be permitted only to the respective benefcial
owner who has paid in full against these securities
under supervision of NSE; and
e. The Depositories and Stock Exchanges shall initiate
appropriate disciplinary regulatory proceedings
against the Noticee for misuse of client funds and
securities as per their respective bye laws, rules and
regulations"
4. KSBL fled an Appeal being Appeal (L) No. 579 of 2019 before
Security Appellate Tribunal (SAT) against the said order of SEBI
dated 22nd November, 2019. On 29th November, 2019 an order was
passed by the SAT directing SEBI to pass appropriate orders after
giving KSBL an opportunity of hearing.
5. On 2nd December, 2019, the Managing Director of NSE
temporarily suspended the trading operations of the KSBL as a stock
broker from all segments.
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6. On 3rd December 2019, the KSBL fled Appeal (L) No. 587 of
2019 before SAT against the aforesaid order dated 2 nd December,
2019. SAT disposed of the Appeal of KSBL with liberty to fle an
Appeal as provided by Rule 13(A)(d) of NSE Rules. KSBL accordingly
fled an Appeal before Member and Core Settlement Guarantee Fuund
Committee (MCSGFuC) of NSE. On 6 th December 2019 MCSGFuC
disposed the Appeal and upheld the decision of temporary
suspension dated 2nd December, 2019. In the said order passed by
the MCSGFuC of NSE it was interalia noted -
(a) The KSBL had admitted that it had wrongly pledged
its client's securities and secured funds on that basis;
(b) The funds were raised by KSBL were misused;
(c) Incorrect information have been provided by KSBL to
the Exchange in the past.
7. On 23rd November, 2020, NSE declared KSBL as defaulter and
expelled KSBL from the membership of the Exchange. On 24 th
November, 2020 BSE also declared KSBL as defaulter and expelled
KSBL from the membership of the Exchange.
8. The KSBL fled an Appeal before SAT challenging the decision
of the NSE of expulsion as stock broker and declaring KSBL as a
defaulter which is stated to be pending. The said Appeal was fled on
01.03.2021.
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9. On 24th November 2020 the Whole Time Members (WTM) of
SEBI vide its order confrmed the directions issued vide ex-parte
order dated 22nd November 2019. It was further directed that KSBL
shall not alienate any of its assets without the prior permission of
NSE, till the settlement of the claims of the investors or any order of
the Court or Tribunal. The Stock Exchanges and Depositories were
directed to initiate appropriate actions against KSBL and its Directors
in accordance with law.
10. On 25th November, 2020, CDSL and NSDL terminated the
participantship of KSBL as a Depository Participant (DP).
11. On 6th Fuebruary 2021, NSDL, CDSL, NSE, BSE and MSEIL issued
Circulars inviting bids (RFuQ) inter-alia stating that Demat Accounts
as well as Trading Accounts held by KSBL shall be transferred to
another depository participant/trading member. The bids were to be
submitted by 12th Fuebruary, 2021. The Circulars set out the details of
the Demat Accounts and Trading Accounts proposed to be
transferred, as follows:
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Demat Accounts
Depository Number of demat Custody value as on
accounts January 31, 2021
NSDL 723,160 28,38,33,29,56,808
CDSL 382,948 1,75,73,92,71,739
Trading Accounts
Exchange Number of registered UCC Accounts
NSE 1156016
BSE 1125808
MSEIL 333,175
As per the Circulars a reserve price of Rs.100/- was fxed for
Demat Accounts and no reserve price was fxed for the Trading
Account. On 12th Fuebruary, 2021 NSDL, CDSL,NSE, BSE and MSEIL
issued Circulars extending the last date for submitting bids till 17 th
Fuebruary 2021. A Standard Operating Procedure (SOP) was
formulated to fnalize the bidding process. Under the SOP, the entire
bidding process was to be completed till 15th March, 2021.
12. On 23rd Fuebruary, 2021, the Respondent Nos. 6-IIFuL Securities
Ltd and Respondent No. 7-Axis Securities Ltd were declared as
successful bidders as Depository Participant and as Trading Member
respectively. An amount of Rs.140 crores is stated to have been paid
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by the successful bidders viz. Respondent No. 6 and the Respondent
No. 7.
13. It is the case of the KSBL that the unilateral transfers of the
Demat Accounts and Trading Accounts held by various clients of the
KSBL (as a participant and stock broker) to other participants/stock
brokers by way of bidding process is completely arbitrary and
without any authority of law. According to the KSBL, there is nothing
to indicate how reserve price of Rs.100/- was fxed for the Demat
Account and how no reserve price was fxed for the Trading
Accounts. According to the KSBL, the sudden process of foating of
bids behind the back of the KSBL without following due process of
law and without putting the KSBL to any notice was a wrongful act
by the Respondent Nos. 1 to 5 and the entire bidding process was
carried out in a hasty manner and there is a serious question of
credibility of the whole process. According to the KSBL, the whole
exercise appears to be tailor-made to transfer the Demat / Trading
Accounts of KSBL to the handpicked rival participants/trading
members at a throw away price.
14. According to the KSBL, as per industry practice in the business
of Broking and DP, the companies on an average are able to get a
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multiple of twelve times their Earning Before Interests, Taxes,
Depreciation and Amortization (EBITA). According to the KSBL going
by that, the valuation of the KSBL's Broking and DP business works
out to around Rs.816 crores (i.e. 12 x Rs.68 crores), whereas the
Respondent Nos. 1 to 5 in extreme haste and reckless manner, sold
the business of the KSBL at around Rs.140 Crore to Respondent Nos.
6 and 7 respectively as reported in the media. According to the
KSBL, there is no power under the Depositories Act, 1996 for CDSL
and NSDL to invite bids, conduct an auction and transfer and/or sell
and/or dispose the DP accounts without notice to KSBL and its
clients. According to the KSBL, even the Respondent Nos. 3 to 5 has
no power or authority under the Securities Contract (Regulation) Act,
1956 and SEBI Act, 1992 to sell and/or transfer the Trading Accounts
to any person. According to KSBL, there is gross misuse of powers by
the Respondents and the price determined is totally adhoc and
without reasonable basis and the entire process initiated vide notice
dated 6th Fuebruary, 2021 and which culminated on 24th Fuebruary,
2021 is arbitrary, irrational, unreasonable and violative of Articles
14, 21 and 300A of the Constitution.
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15. We have heard learned Senior Counsel of the Petitioners and
learned Senior Counsel/Counsel for the Respondents and have
carefully perused the material on record
16. We may frst and foremost make it clear that in the present
Petition we are not concerned with the termination/expulsion of the
KSBL as KSBL has already fled an Appeal before SAT which is
pending.
17. We note that the tenders (RFuQs) were issued on 6 th Fuebruary,
2021 by Respondent Nos. 1 and 2 and Respondent Nos. 3 to 5
respectively. The successful bidders viz. Respondent No. 6 and
Respondent No. 7 were notifed on 24th Fuebruary, 2021. KSBL has not
explained the delay since 6 th Fuebruary, 2021 and has chosen to
remain silent and has fled the present Writ Petition only on 2 nd
March, 2021 after Respondent No. 6 & Respondent No. 7 were
declared as the successful bidders and had paid the entire bid
amounts on 25th Fuebruary 2021 towards transfer of Demat Accounts
and Trading Accounts respectively. In the circumstances, on this
ground alone, no relief can be granted to the Petitioner at this stage.
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18. We also note that Appeal was fled by KSBL before SAT on 1 st
March, 2021 interalia against the order dated 23 rd November, 2020
passed by NSE of expulsion and declaring KSBL as a defaulter,
wherein the following reliefs were sought:
7. (i) To quash and set aside the Impugned Order
dated November 23, 2020 passed by the
Respondent Nos. 1. (Exhibit A of the Memorandum of
the Appeal;
(ii) To quash and set aside; (a) the consequential
directions issued by BSE and MSEIL (pursuant to the
impugned order passed by NSE) expelling and
declaring the Appellant as defaulters; and (b) the
consequential directions issued by NSDL and CDSL
(pursuant to the Impugned Order passed by NSE)
terminating the Participantship of the Appellant with
NSDL & CDSL.
8. Fuor interim order/reliefs:
(i) The efect, implementation and operation of the
impugned order dated November 23, 2020 be stayed;
and
(ii) Ad-interim order in terms of prayer (i) above.
However, the Appeal was not moved by KSBL seeking stay to the
impugned orders of expulsion/termination by
NSE/BSE/MSEIL/NSDL/CDSL.
19. We have been taken through the statutory framework
governing the Demat Accounts and Trading Accounts viz. SEBI Act
1992, Depositories Act, 1996, Securities Contract (Regulation) Act,
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1956, SEBI (Depositories and Participants) Regulations 2018, SEBI
(Intermediaries) Regulation, 2018 and the relevant provisions of
Bye-Laws of NSDL, CDSL, NSE and BSE.
20. The relevant provisions of the Bye-Laws framed by NSDL in
exercise of powers conferred under section 26 of the Depositories
Act, 1996 are extracted hereunder:
6.5.4 CONSEQUENCES OF TERMINATION:
v) The Depository shall notify the Participant and other
Participants and the Securities and Exchange Board of
India within seven days of the termination of the
Participant under Bye Laws 6.5.1, 6.5.2 and 6.5.3
above. The Participant shall inform all its Clients of
such termination within a period of seven days from
the date on which it receives notice of such
termination.
vi) The Participant shall be required to meet all its
outstanding obligations to the Depository while the
Participant was acting as such and the Client shall
have the option of either getting the securities held
with the Participant transferred to another Participant,
or get the securities rematerialised within thirty days
from the date of receipt of intimation as mentioned in
Bye Law 6.5.4 (v).
vii) In case Clients do not respond to the advise of the
Participant as per Bye Law 6.5.4 (vi), the Participant
may request the Depository to manage the accounts of
such Clients on its behalf, on such terms and
conditions as may be prescribed by the Depository,
from time to time.
Provided further that the Depository may, on its
own, decide to manage the accounts of the Clients of
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the Participant(s) or may nominate one or more
Participants to whom such accounts shall stand
transferred.
Provided that no transactions in respect of the
securities in such account shall be efected until such
time as the concerned Benefcial Owner shall make an
application and its acceptance by nominated
Participant(s) as per Bye law 9.1.6
Provided however that the requirement of
furnishing transaction statement including statement
of accounts as per Bye Law 6.4.4 will not apply to the
Client accounts, decided to be managed by the
Depository.
21. The relevant provisions of the Bye-Laws framed by CDSL read
thus:
"Clause 5.5.4.7 - On termination of the
agreement with a participant or on withdrawal
by the participant from CDSL, every Benefcial
Owner of that participant shall have the option of
either getting his securities held with the participant
transferred to another participant, or get the securities
rematerialised. Notwithstanding anything stated above
even after such termination, the participant shall act
as a participant for the limited purpose of either
getting the securities held with the participant
transferred to another participant or get the securities
rematerialised.
Clause 5.5.4.8. - Upon termination of the agreement
with a participant, CDSL shall give notice in writing to
all Benefcial Owners holding accounts with such
participant calling upon the Benefcial Owners to have
their accounts transferred to any other participant
within 15 days from the receipt of such notice. In the
event of there being any Benefcial Owners who have
failed to have their accounts transferred to any other
participant as aforesaid, CDSL shall nominate one or
more participants to whom such accounts shall stand
transferred for the time being provided however that
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no transactions in respect of the securities in such
account shall be efected until such time as the
concerned Benefcial Owner shall have acknowledged
receipt of and thereby shall have agreed to be bound
by the DP-BO Rights and Obligations document, to
such participant."
22. On a plain reading of the aforesaid provisions, we are of the
view that there are sufcient powers and authority under the Bye-
Laws vested in NSDL/CDSL to manage the accounts of the clients of
the KSBL and/or to nominate one or more Depository Participant to
whom the DP Accounts may be transferred on the termination of the
Petitioner as Depository Participant.
23. The relevant provisions of the Bye-Laws framed by NSE are
extracted hereunder:
"Vesting of assets in the Exchange
(11) The Defaulters' Committee shall call in and realise
the security deposits in any form, margin money, other
amounts lying to the credit of and securities deposited
by the defaulter and recover all moneys, securities and
other assets due, payable or deliverable to the
defaulter by any other Trading Member in respect of
any transaction or dealing made subject to the Bye-
laws, Rules and Regulations of the Exchange and such
assets shall vest ipso facto, on declaration of any
trading member as a defaulter, in the Exchange for the
beneft of and on account of any dues of the Exchange,
National Securities Clearing Corporation Limited,
Securities and Exchange Board of India, other trading
members, Constituents and registered sub-brokers of
the defaulter, approved banks and any other persons
as may be approved by the Defaulters' Committee and
other recognised stock exchanges."
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24. The relevant provisions of the Bye-Laws framed by BSE are
extracted hereunder:
"Vesting of assets in the Exchange
(11) The Defaulters' Committee shall call in and realise
the deposits in any form, margin money, other
amounts lying to the credit of and securities deposited
by the defaulter and recover all monies, securities and
other assets due, payable or deliverable to the
defaulter by any other member/constituent in respect
of any transaction or dealing made subject to the Bye-
laws, Rules and Regulations of the Exchange and/or all
other assets/amounts/securities belonging to other
parties which the Exchange may be entitled to realize
and appropriate. All these assets shall vest ipso facto,
on declaration of a member as a defaulter in the
Exchange for the beneft of and on account of any dues
or obligations of the defaulter to the Exchange, clearing
corporation, SEBI, other members, Constituents,
Investor Protection Fuund, approved banks and any
other persons as may be approved by the Defaulters'
Committee and other recognised stock exchanges in
the manner provided in these Bye-laws and/or as may
be prescribed by SEBI from time to time."
25. According to the Respondents, the role of the KSBL as a
Depository Participant was only of an agent and as intermediary
between NSDL/CDSL and clients, who are holding the Demat
Accounts with NSDL/CDSL through the KSBL and the role of DP is to
facilitate the opening of Demat Account (through system provided
by NSDL/CDSL), de-materialization of the securities and ofer
services connected with maintenance of ownership, records and
transfer of ownership of the securities in the records of NSDL/CDSL.
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It is contented on behalf of the Respondents that KSBL has no right
over the Demat Accounts of the benefcial owners with the
NSDL/CDSL and such Demat Accounts are not the property of the
KSBL. It is contended that a Stock Broker merely acts as an agent of
his clients and executes trades on their behalf at the Exchanges and
KSBL has no right over the Trading Accounts of their clients.
26. NSDL, CDSL, NSE and IIFuL (Respondent No. 6) have fled
Afdavit-in-Reply. The relevant paragraphs of the Afdavit-in-Reply of
the NSDL read as follows:
9. Each and every customer of the Petitioner is
free to move over to any other depository participant.
Considering that the customers i.e. the investors in
securities would be directly and vitally afected by
cessation of the Petitioner's right to provide the
services, and indeed considering that the Petitioner's
inability to fund the dues owned by it to various
customers and such customers are bleeding, and
innovative approach has been adopted to get economic
value for the beneft of the customers and indeed to the
beneft of the Petitioner itself, by creating a framework
of an auction which would bring value. Even if this
approach had not been adopted, every single customer
of the Petitioner can move the demat account (or for
that matter a Broking account) to another service
provider with not a single rupee accruing to the
Petitioner in the process. Put diferently, a recognized
service provider of depository services would cease to
be one once the recognition is lost. The client would
move to other service providers and there would be
nothing left to the beneft of the expelled depository
participant. In the instant case, it has been made clear
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and is evident from the record that the proceeds of the
"auction" would be used to pay the dues owned by the
Petitioner to its customers. In short, where nothing
would have been gained from the fight of customers,
the current process enabled a cash fow, which would
only go towards paying the liabilities of the defaulting
and expelled Petitioner.
18. It is relevant to note that from the time of 22 nd
November order, there has been a signifcant and
continued depletion of the demat accounts of the
Petitioner, which is evidenced from the following:
Tabular Chart indicating depletion in Number of Client's Demat
Accounts held by Karvy with NSDL since 22 November, 2019
Dates Events Number of Reduction in
Demat Number of
Accounts Accounts
22-Nov-19 Ex-parte Interim 7,91,923
Order issued by
SEBI
24-Nov-20 Confrmatory Order 7,52,416 39,507
issued by SEBI
01-Dec-20 Termination of 7,51,707 709
Karvy as DP of
NSDL
31-Dec-20 End of Month 7,37,092 14,615
31-Jan-21 End of Month 7,23,160 13,932
28-Fueb-21 End of Month 7,07,595 15,328
Total number of Demat Accounts closed by 84,328
Clients till 28 Fueb 2021
27. The relevant paragraphs of the Afdavit-in-Reply of the CDSL
read as follows:
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19. It is pertinent to note that the aforesaid
regulatory framework does not specify the mode and/or
manner by which CDSL can transfer the demat accounts
opened through a terminated depository participant. As
such, the mode and/or manner in which the transfer may
take place is left to the discretion of CDSL albeit with
one very important caveat - that the transfer must be in
the interest of benefcial owner (i.e. the holders of the
demat accounts opened through a terminated
depository participant in whom all rights of ownership of
the securities placed in the demat account vest).
20. It is in the aforesaid background that CDSL,
along with Respondent No. 1, 3, 4 and 5 have together,
in exercise of their discretion based upon specialized
and technical knowledge and know-how, devised the
current method of transfer of the Demat accounts
opened through a terminated Depository Participant by
way of auction. The intent behind such a mode of
transfer is to ensure that the highest value can be
obtained by way of a formal, transparent and open
bidding process so that the interests of the investors
and/or benefcial owners are best served. The tender
document / Request for Quote (Exhibit I to the captioned
Petition) expressly states that the funds raised from the
bidding shall be utilised to settle the claims of the
investors and/or benefcial owners which were earlier
serviced by terminated depository participant/expelled
trading member. It is therefore, evident that the present
mode/manner of transfer by way of auction is in keeping
with the letter and spirit of the regulatory framework to
ensure that the interest of the investors and/or
benefcial owners are best served and protected.
22. I say that it was on account of the aforesaid
provisions in the CDSL Bye-laws that CDSL alongwith
NSDL (i.e. Respondent No. 1) and the Stock Exchanges
(i.e. Respondent Nos. 3 to 5) mutually decided on a
Standard Operating Procedure ("SOP") for the transfer of
demat accounts serviced by a terminated depository
participant and trading accounts serviced by a expelled
trading member, taking into account the best interest of
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the investors and/or benefcial owners and after
consultation with SEBI on the concept. A copy of the
correspondence exchanged between SEBI and
Respondent Nos. 1 to 5 for the formulation of the SOP is
hereto annexed and marked as Exhibit - C. A copy of the
SOP is hereto annexed and marked as Exhibit - D.
25. I say that in addition to the fact that CDSL has
the power to transfer the demat accounts of a
terminated depository participant and in exercise of such
power, formulate the SOP, it is also pertinent to note
that the SOP was formulated by Respondent Nos. 1 to 5
after consultation with SEBI on the concept, with the
overarching objective of ensuring continuity of service
by the terminated depository participant/expelled
trading member, and to ensure that any claims made by
aggrieved investors and/or benefcial owners could be
settled to the maximum extent possible.
26. I say that the primary objective for the
formulation of the SOP was to address situation wherein
claims made by investors and/or benefcial owners
against terminated depository participants/expelled
trading member are not settled due to insufciency of
funds in the investor protections funds or pursuant to
sale of assets of the terminated depository
participant/trading member. I say that in light thereof,
the SOP introduces a way to generate funds which could
be used to settle a claims of any aggrieved investors
and/or benefcial owner. The SOP also specifcally notes
that Respondent Nos. 1 to 5 are only meant to be the
facilitators of the process envisaged therein to evaluate
and select the winning bidder for the demat accounts
and the trading accounts.
27. I say that the transparency and fairness of the
process in the SOP is explicit from the following:
(I) Detailed eligibility criteria have been set out for the
bidders, including a minimum net worth and minimum
experience requirement based on the number of demat
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accounts/trading accounts which are to be transferred in
order to ensure the fnancial and operational stability of
the bidder in the best interest of the demat account
holders;
(ii) Separate bids would be invited for the trading
accounts and the demat account;
(iii) The bidders are required to be compliant with the
securities laws and no adverse order should be in force
against them;
(iv) The issuance of the request for Quote shall be
published through circulars as well as on the website of
the Respondent Nos. 1 to 5;
(v) The Reserve Price may be set by the Respondent
Nos. 1 to 5 after mutual consultation and the same shall
be disclosed in the circulars published; and
(vi) The evaluation of the bids shall be undertaken by a
joint committee comprising of senior ofcials of the
Respondent Nos. 1 to 5;
28. It is submitted that in addition to the aforesaid,
the SOP also lays down how the funds raised from
bidding process are to be utilised. I think that the SOP
provides that the amounts received for the trading
account and demat accounts shall, after adjusting the
dues of the depositories, be placed in escrow account of
the stock exchange for a period of 3 years during which
period claims from investors shall be received and
admitted by the stock exchange. Pertinently, the SOP
also provides that in the event any funds remains from
such bidding amounts, the same shall be transferred to
the depository participant/trading members who was
terminated/expelled.
29. I say that CDSL and Respondent Nos. 1, 3 to 5
have taken all steps in compliance with the process
envisaged under the SOP, pursuant to which Respondent
Nos. 6 and 7 have been selected as the successful
bidders for the demat and trading account respectively. I
say that CDSL has followed a fair and transparent
process in the selection of Respondent Nos. 6 and 7 and
has, all stage at all stage, adhered strictly to the terms
and conditions of the SOP.
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31. I further say that considering the Petitioner
was a terminated as a depository participants of CDSL
efectively from 26th November 2020, there has been
absolutely no haste in the actions of the CDSL to
transfer demat accounts serviced by the petitioner to
another depository participant. I further say that
Respondent Nos. 1 to 5 have carried out the process in
envisaged in the SOP in a complete transparent manner
by publishing all details in relation thereto, which has in
fact been relied upon by the Petitioner in the captioned
Petition. I say that the Petitioner has repeatedly tried to
thwart any attempt made by the CDSL to ensure that
the interests of the benefcial owners are protected.
32. I further say that the CDSL has ensured that
the right of the demat account holders to be given an
opportunity to shift their demat accounts to a depository
participant of their choice, remains protected.
Consequently, while CDSL has received the bid amount
from Respondent No. 6 CDSL has issued a Nomination
Letter to the Demat account holder on 1 st March 2021
granting them time till 15th March 2021 to indicate if
they do not wish to transfer their demat account to
Respondent No. 6. I say that on account of the Petitioner
having been terminated as a depository participant after
adequate opportunities of hearing been granted to the
Petitioner, the Petitioner is not entitled to any hearing
whatsoever before the demat accounts are transferred
to Respondent No. 6. I, therefore, say that the
contentions of the Petitioner that adequate notice has
not been given to the Petitioner and a demat account
holders is grossly incorrect and misleading.
33. In view of what has been stated hereinabove, it
is submitted that despite the said SOP being created
solely for the beneft of the investors and/or benefcial
owners in order to give them continuous access to the
securities market and provide funds to meet their
claims, and the same been specifed in all the circulars
and articles relied upon by the Petitioners, the Petitioner
has fled captioned Petition to create hurdles in the
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process of transfer of Demat account and trading
account to Respondent Nos. 6 and 7 respectively, by
merely making bald allegations of such transfer being
purportedly illegal, arbitrary and unconstitutional. I say
that such allegations of the Petitioner must be held to be
without any substance whatsoever and the reliefs
sought in the caption Petition ought to be rejected for
forthwith.
35. I say that the Petitioner was a depository
participants of CDSL who acted as an agent of CDSL and
as an intermediary between CDSL and benefcial owners
who held Demat accounts with CDSL through the
Petitioner. I say that the role of the Depository
Participant is to facilitate the opening of Demat account
(through the system provided by CDSL), the
dematerialisation of securities, and ofer services
connected with the maintenance of ownership records
and transfer of ownership of securities in the records of
CDSL. I say that on account thereof the Petitioner had no
right whatsoever on the demat account held by the
benefcial owners with the CDSL and such Demat
accounts cannot in any manner be considered as the
'property' of the Petitioner, as is sought to be claimed in
the captioned Petition.
39. I say that in accordance with the CDSL Bye-
Laws, CDSL issued a show-cause notice dated 10 th
January 2020 to the Petitioner to show-cause as to why
the Petitioner should not be terminated as a depository
participant of CDSL. I say that after giving adequate
opportunities to the Petitioner to respond to such show-
cause notice, CDSL issued a termination notice on 25 th
November, 2020, on account of various defaults
including non-payment of dues of more that INR 80
Lakhs to CDSL. A copy of such termination notice is
annexed with the captioned Petition as Exhibit - G
therein. I further say that such termination has not been
challenged by the Petitioner till date and has therefore,
attained fnality.
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28. The relevant paragraphs of the Afdavit-in-Reply fled by the
NSE reads as follows:
(ii) (h) Post December, 2019 NSE took several steps,
including but not limited to the following, all in the
interest of the investors.
1. Fuunds to the tune of Rs.76.16 Crores have
been paid to 1,73,841 clients of Karvy in
settlement of their accounts.
2. Securities to the tune of Rs.2,216,88 Crores
have been paid to 1,39,525 clients of Karvy in
settlement of their accounts.
3. Based on the SEBI confrmation order dated
24th November, 2020, NSE had issued directions to
the relevant banks to freeze the bank accounts of
Karvy so that the funds cannot be alienated by
Karvy and can be met for the payment of claims of
Karvy investors.
III The process initiated by NSE and other Authorities to
transfer trading accounts to Karvy to another member is
in accordance with the law:
(a) As per the SEBI circular of 1st July, 2020, SEBI
is entitled, authorized and empower NSE and all
Stock Exchanges to take appropriate actions and
measures to recover the defcit amount from the
defaulter members by liquidating its assets. The
said Circular also empowers the Exchanges to
approach the appropriate Court of law, if required.
(b) Fuurther, as per the Chapter XII of the Bye-laws
of the NSE, title "defaulter", once a trading
member is declared as a defaulter, the Defaulters
Committee is entered to call in and realize all the
securities deposit, security amounts and assets of
the default members. If as mentioned in
paragraph 25 the writ petition, the Demat
accounts and Trading Accounts are of the property
of the Petitioner (which is the Petitioner claims to
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be), than the Defaulter Committee is entitled to
receive the same and realise it in the manner
deems ft and appropriate for compensation the
clients of Karvy for the losses sufered by them. If
the clients' assets belonging to Karvy's clients
then Karvy can make no grievance if they are
transferred. Such transfer has to be made in the
interest of the clients to enable them to trade,
otherwise they are blocked from trading. Even
otherwise, the clients are always entitled to
transfer their accounts from Karvy to any other
party. So, Karvy cannot claim any vested or
proprietorial right or interest in the clients
accounts.
IV. As a result of the successful completion of the
Request for Quotations, the clients of Karvy will
beneft at large:
a) As per the request of Quotations of 6th
Fuebruary 2021, the Respondents have received a
bid and accordingly, Respondent Nos. 5 and 6
herein have been declared as successful bidders.
b) It should be noted that from 23rd
November 2020 till now Karvy took no step to ask
its clients to transfer their accounts, which Karvy
ought to have done in the clients interest. Hence,
the bidding process become necessary.
c) The said bidding process is completed and the
Respondents have received to give an aggregate
sum of Rs.11.75 crores to transfer of 11.15 Lakhs
trading accounts of NSE, 11.25 lakh trading
accounts of BSE and 3.33 Lakhs trading account
of MSE.
d) In furtherance thereof, a Public Notice
was also to be issued by NSE and other
Respondents. However, on account of fling of the
present Writ Petitions, issuance of Public Notice
have been put on hold by NSE.
e) Accordingly, further action of NSE and
other Respondents is only made with intent to
protect the investors' interest. The amount
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realized from the successful bidder, will be utilised
by NSE towards settling the claims of the clients
of Karvy. This will beneft Karvy itself. Had the
clients themselves transferred their accounts
(which they were entitled to do) no beneft would
have accrued to Karvy at all.
29. Learned Senior Counsel on behalf of the Petitioner-KSBL interalia
submitted that the auction has resulted in a windfall for the Respondent Nos. 6
and 7. He submitted that the acquisition of the demat accounts and trading
accounts of KSBL ought to have fetched at least Rs. 816 crores going by the
EBITDA method of valuation. He pointed out that there were more than
11,00,000 demat accounts and more than 25,00,000 trading accounts (before
depletion). He pointed out that the annual maintenance of a demat account
charged by a Depository Participant is on an average Rs. 500/- and that itself
would add upto Rs. 55 Crore (11,00,000 X 500) annually for the demat
accounts only. He submitted that apart from that, Rs. 10-12 is charged for
each transaction. He submitted that the amount of Rs. 140 crores fetched at
the auction is a throwaway price considering the volume of the accounts and
custody value of the demat/trading accounts. He submitted that the entire
bidding process is arbitrary and there is a serious issue of credibility of the
whole process.
30. On behalf of the Respondents, it is submitted that the entire bidding
process was fair and transparent and that the EBITDA is a method of
valuation of a going concern, which is not applicable to KSBL's case as the
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accounts are not the property of KSBL and that in any event KSBL has
already been declared a defaulter and expelled/terminated as a Trading
Member/Depository Participant.
31. It can hardly be disputed that KSBL had wrongly pledged the securities
of its clients and raised funds for its own benefit and had misused the Powers
of Attorney of its clients. Once KSBL was declared to be a defaulter and
expelled/terminated as a Trading Member of the Exchanges and as
Depository Participant, the demat accounts/trading accounts of the clients of
KSBL became inactive due to deactivation of trading terminals of KSBL.
Inasmuch as the demat accounts/trading accounts having been blocked from
trading, the clients of KSBL had no access to their own demat account/trading
account and no transactions could be carried out by them. The clients of KSBL
were thus left in a lurch. In these circumstances, the decision of the
NSDL/CDSL/NSE/BSE/MSEIL to undertake the process of nomination of
another trading member/depository participant in place of KSBL cannot be
faulted. Their action was only to protect the interest of the clients of KSBL,
whose interest is paramount. NSDL/CDSL/NSE/BSE/MSEIL had acted in
public interest. We also cannot fault the 'decision' of
NSDL/CDSL/NSE/BSE/MSEIL to invite bids from other Trading
Members/Depository Participants for acquisition of the demat accounts/trading
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accounts of the clients of KSBL since the funds generated from the auction
are to be utilized to settle claims of aggrieved investors and/or beneficial
owners of the accounts which would in turn benefit KSBL as its liability would
reduce to that extent. Undoubtedly, the right of the demat account/trading
account holders to shift to another Depository Participant/Trading Member of
their choice remains intact and protected. Though we do not fault the
'decision' to invite bids, the matter needs to be examined only to the limited
extent of the auction process adopted and valuation.
32. It is conceded before that Court that this is the frst time such a
situation has arisen and there is no earlier precedent where bids
have been invited for the acquisition of the demat accounts/trading
accounts of a Depository Participant/Trading Member who has been
expelled/terminated. In the Afdavit in Reply of the NSDL, it is stated
that an innovative approach has been adopted to get economic value for the
benefit of the customers and for the benefit of KSBL itself by creating a
framework of an auction which would bring value and that it was mutually
decided by Respondent Nos.1 to 5 on Standard Operating Procedure (SOP)
for the transfer of demat accounts serviced by a terminated depository
participant and trading accounts serviced by an expelled trading member,
taking into account the best interest of the investors and/or beneficial owners
and after consultation with SEBI on the concept and that the SOP was
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introduced to generate funds and further that the evaluation and selection
procedure has been done by a Joint Committee of Market Infrastructure
Institution.
33. We find that the Affidavits in Reply filed by NSDL/CDSL/NSE are bereft
of particulars of the auction process. There are no particulars in the Affidavits
in Reply as to how many bids were received in respect of the demat accounts
of NSDL/ CDSL and how many bids were received for the trading accounts of
NSE/BSE/MSEIL. There is no further bifurcation given of the auction price
fetched for the demat accounts and trading accounts. A reserve price of an
adhoc amount of Rs. 100/- per demat account was fixed in the tender (RFQ).
On what basis the reserve price was arrived at is not explained. Why no
reserve price was fixed for each trading account is not explained. There is no
valuation report of any expert shown to us or relied upon in the Affidavits in
Reply. It is only when the arguments were over and it was pointed out by the
Court that there are no particulars in the Affidavits in Reply about the auction
conducted and when the matter was kept today for orders, that a summary of
written arguments (undated) is tendered on behalf of CDSL which sets out
some particulars. We would like the same to be placed on record in the form
of an Affidavit. In the facts of the present case, it is not possible to accept the
contention on behalf of the Respondents that the demat accounts and trading
accounts would have no value as on their own showing an amount of Rs. 140
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crores was fetched in the auction. Besides, so far as demat accounts are
concerned, NSDL/CDSL had attached a value themselves to the said demat
accounts by showing a reserve price of Rs. 100/- per account in the tender
(RFQ).
34. The subject matter of the Petition is about 25,00,000 trading accounts and
about 11,00,000 demat accounts of the investors/beneficial owners who were
the clients of KSBL. The custody value of the demat accounts alone as on 31
January 2021 is a mind-boggling figure of more than 3 lac crores. To satisfy
our judicial conscience, we are inclined to call for valuation report/s
notwithstanding the contention of the Respondents that the said demat
accounts and trading accounts cannot be valued. The learned Senior Counsel
for the Petitioners has fairly agreed to bear the fees of the Valuer/s.
35. Since KSBL is claiming infringement of its fundamental rights under
Articles 14 and 21 of the Constitution of India as also Article 300A in respect of
the auction process adopted by Respondent Nos.1 to 5 without notice and
behind their back, and since the auction process is not a subject matter of
challenge before any forum, it cannot be said at least at this stage, that this
Court ought not to examine the case of KSBL and it be relegated to SEBI/SAT,
which learned Senior Counsel for KSBL submits is not an alternate efficacious
remedy. The fact that KSBL is a defaulter and has been expelled/terminated
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as a Trading member/Depository participant cannot be a ground to discard the
case of KSBL, at the threshold, when it is an admitted position that the price
which is fetched in the auction would ultimately benefit the investors and/or
beneficial owners of the accounts and is to be utilized towards settlement of
their claims against KSBL and the liability of KSBL would reduce to that
extent. In the facts of the present case, the judgments in Haji T.M.Hasan
Rawther v/s. Kerala Financial Corporation, (1988) 1 SCC 166 and
Michigan Rubber (India) Ltd. v/s. State of Karnataka & Ors., (2012) 8 SCC
216 relied upon by learned Senior Counsel on behalf of CDSL would not
assist the Respondents.
36. Let the Respondents fle comprehensive Afdavits-in-Reply
with regard to the auction process and valuation of the demat
accounts and trading accounts. At this stage, subject to further
orders, by way of ad-interim relief, we pass the following order:
ORDER
(i) The ad-interim relief seeking to restrain Respondent Nos. 1 to 5 from completing or confrming the process of transferring the Demat and Trading Accounts held by KSBL to Respondent Nos. 6 & 7 and for further steps being taken by Respondents Nos.6 & 7, is rejected.
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(ii) We appoint SBI Cap Markets Ltd. as well as KPMG LLP, as Valuers, who shall submit their separate Valuation Reports in respect of valuation of the demat accounts and trading accounts of the clients of KSDL as on the date of tender(RFuQ) as well as on the date of Valuation Report (after depletion of accounts). We deem it appropriate to call for two Valuation Reports considering the complexities involved in the valuation and as we have been told that such exercise of auction or valuation of the demat accounts and trading accounts has never been carried out earlier. Since it is contended on behalf of the Petitioners that there can be no valuation arrived at, we make it clear that it would be open for the Valuers to say so in their Valuation Report. It will be open for the parties to suggest to the Valuers the method to valuation that can be applied. The Valuers shall however arrive at their own independent assessment and valuation. Let such Valuation Reports be submitted before the next date. We record the statement of the learned Senior Counsel on behalf of KSBL that KSBL shall pay fees of the Valuers.
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(iii) All the parties shall co-operate with the Valuers in furnishing all necessary data to the Valuers till the time the Valuation Reports are submitted.
(iv) The bid amounts paid by Respondent Nos 6 & 7 pursuant to the auction, shall be held by NSDL/CDSL/NSE/BSE/MSEIL as deposit and shall not be dealt with until the next date.
(v) Respondents Nos.6 & 7 shall keep accounts of the investors/benefcial owners including any transactions efected.
(vi) We, however, make it clear that there is no question of stay to any further transfer of the demat/trading accounts of the investors/benefcial owners from Respondents Nos.6 & 7 as Depository Participant/Trading Member, to another Depository Participant/Trading Member as that is always the prerogative and option of the investors/benefcial owners.
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37. List the Petition on 3rd May 2021.
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