Securities Appellate Tribunal
Axis Bank Ltd vs Sebi on 29 November, 2021
Author: Tarun Agarwala
Bench: Tarun Agarwala
BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Order Reserved :07.09.2021
Date of Decision:29.11.2021
Appeal No.140 of 2021
Axis Bank Ltd.
Trishul, 3rd Floor,
Opposite Samartheshwar Temple,
Near Law Garden, Ellisbridge,
Ahmedabad-380-006. ...Appellant
Versus
1.National Stock Exchange of India Ltd. Exchange Plaza, Plot No.C/1, G Block, Bandra Kurla Complex, Bandra (E), Mumbai-400 051.
2. Securities and Exchange Board of India SEBI Bhavan, Plot No.C4-A, "G" Block, Bandra Kurla Complex, Bandra (East), Mumbai - 400 051.
3. Karvy Stock Broking Ltd.
Karvy Millennium, Plot No.31-P, Nanakramguda Financial District, Gachibowli, Hyderabad-500 032. ...Respondents Mr. Gaurav Joshi, Senior Advocate with Mr. Neville Lashkari, Mr. Chaitanya D. Mehta and Ms. Sonali Aggarwal, Advocates i/b. M/s Dhruve Liladhar & Co. for the Appellant. Mr. V.R. Dhond, Senior Advocate with Mr. Indranil Deshmukh, Mr. Adarsh Saxena, Ms. Drishti Das and Mr. Varun Srinivasan, Advocates i/b. Cyril Amarchand Mangaldas Advocates for the Respondent no.1. 2 Mr. Rafique Dada, Senior Advocate with Mr. Ravishekhar Pandey and Ms. Prerna Sharma, Advocates i/b. The Law Point for the Respondent No.2.
CORAM: Justice Tarun Agarwala, Presiding Officer Justice M.T. Joshi, Judicial Member Per: Justice Tarun Agarwala, Presiding Officer
1. The appellant has challenged the impugned communication dated 8th December, 2020 issued by the respondent no.1 National Stock Exchange of India Ltd. (hereinafter referred to as „NSE‟) holding that the bank accounts of respondent no.3 Karvy Stock Broking Ltd. becomes the assets of the defaulter committee of NSE since respondent no.3 has been declared a defaulter and expelled from the membership of respondent no.1.
2. The appellant is a listed commercial bank under the Banking Regulations Act, 1949 and is in the business of issuing credit facilities against securities. Respondent no.1 is a registered stock exchange under the Securities Contracts (Regulation) Act, 1956 (hereinafter referred to as „SCRA Act‟). Respondent no.2 Securities and Exchange Board of India 3 (hereinafter referred to as „SEBI‟) is the regulator of the stock market and respondent no.3 is a stock broker registered with NSE.
3. It is alleged that in the course of its banking business the appellant had granted several credit facilities to respondent no.3 and, as on the date of filing of the appeal, respondent no.3 owed a sum of Rs.165 crores alongwith interest to the appellant. It is alleged that on 27th January, 2021 the appellant has 8,27,39,334.30 in the bank account/fixed deposit accounts of the appellants. It is also alleged that out of the total amount of 8,27,39,334.30 a sum of Rs.7,98,73,559.25 are funds which are the exclusive property of the respondent no.3 and the balance amount of Rs.28,65,775.05 belongs to clients and other parties.
4. On 22nd November, 2019, SEBI passed an ex-parte ad-interim order against Karvy wherein the following directions were issued:
"21. Under the above circumstances, I, in exercise of powers conferred upon me under Sections 11(1), 11(4) and 11B read with Section 19 of the SEBI Act, 1992 and 4 Regulation 35 of SEBI (Intermediaries) Regulations, 2008, by way of this ex parte ad interim order, pending forensic audit, hereby issue the following directions:
(i) KSBL is prohibited from taking new clients in respect of its stock broking activities;
(ii) 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 instruction given by KSBL in pursuance of power of attorney given to KSBL by its clients, with immediate effect;
(iii) The Depositories shall monitor the movement of securities into and from the DP account of clients of KSBL as DP to ensure that clients' operations are not affected;
(iv) The Depositories shall not allow transfer of securities from DP account no.11458979, named KARVY STOCK BROKING LTD (BSE) with immediate effect.
The transfer of securities from DP account no.11458979, named KARVY STOCK BROKING LTD (BSE) shall be permitted only to the respective beneficial owner who has paid in full against these securities, under supervision of NSE; and
(v) The Depositories and Stock Exchanges shall initiate appropriate disciplinary regulatory proceedings against the Noticee for misuse of clients' funds and securities as per their respective bye laws, rules and regulations;........."
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5. The aforesaid order was passed on the ground that respondent no.3 had misused clients securities by unauthorisedly pledging the securities which belonged to the clients.
6. On 23rd November, 2020 respondent no.3 was declared a defaulter under Chapter XII of the Byelaws of NSE and was accordingly dismissed from the membership of respondent no.1 as a trading member.
7. On 24th November, 2020, SEBI passed a confirmatory order based on the forensic report. While confirming the ex-parte ad-interim order dated 22nd November, 2019 the WTM issued the following directions:
"30. In view of the above, I deem it fit to proceed further in the facts and circumstances of the case and in exercise of powers conferred upon me under Sections 11(1), 11(4) and 11B read with Section 19 of the SEBI Act, 1992 and Regulation 35 of SEBI (Intermediaries) Regulations, 2008, hereby confirm the directions issued vide ex parte ad interim order dated November 22, 2019.
31. Transfer of funds/securities made by the KSBL to its clients subsequent to SEBI order dated November 22, 2019, would not absolve KSBL or its directors from violations of the 6 provisions of the securities laws, as have been found in the forensic audit report received in the matter. It is clarified that confirmation of the directions issued in the ex parte order by the present order shall not in any way come in the way of transfer of the funds/securities, to be made by the KSBL to its clients. KSBL shall not alienate any of its assets, except with the prior permission of NSE till the settlement of claims of the investors or under direction or order by any Court or Tribunal.
32. Stock Exchanges and Depositories shall initiate appropriate action against KSBL and its directors, for the violations of their respective bye-laws, as have been found in the forensic audit report received in the matter, in accordance with law. NSE shall invite and deal with the claims of the clients of KSBL, in accordance with its bye-laws."
8. Based on the confirmatory order dated 24th November, 2021 NSE issued the impugned communication dated 8th December, 2020 against which the present appeal has been filed.
9. We have heard Mr. Gaurav Joshi, Senior Advocate assisted by Mr. Neville Lashkari, Mr. Chaitanya D. Mehta and Ms. Sonali Aggarwal, Advocates for the appellant, Mr. V.R. Dhond, Senior Advocate assisted by Mr. Indranil Deshmukh, Mr. Adarsh Saxena, Ms. Drishti Das and Mr. Varun Srinivasan, Advocates for the respondent no.1 and 7 Mr. Rafique Dada, Senior Advocate assisted by Mr. Ravishekhar Pandey and Ms. Prerna Sharma, Advocates for the respondent no.2.
10. The contention of the appellant is, that the impugned communication is without jurisdiction. NSE has no power to issue any directions to the appellant to freeze the accounts of the appellant on which the appellants has a bankers lien as per Section 171 of the Indian Contract Act, 1872. It is also contended that the appellant is a commercial bank and is not a trading member and therefore is not bound by SEBI laws including the bye laws of NSE.
11. The stand of the respondent no.1 NSE is, that the impugned communication dated 8th December, 2020 issued by email was in pursuance to a confirmatory order dated 24th November, 2020 in terms of which respondent no.3 has been restrained from alienating its assets till the settlement of the claims of the investors or under direction or order by any Court or Tribunal. It was contended that since the appellant has not challenged the confirmatory order the appeal is not 8 maintainable. It was also contended that the appellants cannot exercise its rights of bankers lien against the amounts in the bank accounts towards the alleged discharge of debt of approximately 165 crores in as much as the appellant has already filed a petition before the Debt Recovery Tribunal, Hyderabad which is pending consideration. It was also contended that since respondent no.3 has been declared a defaulter, the property of respondent no.3 vests in the defaulters committee under bye law 11 of Chapter XII of the NSE bye laws. It is contended that Chapter XII sets forth the process and procedure for dealing with the defaults committed by trading member and consequent redressal of investor grievance from such defaults. It was contended that bye law 11 has been contemplated in the securities market framework to provide a legal settlement mechanism for defaulting securities market players and provide opportunity for innocent retail clients of defaulting members to approach a dedicated ombudsman that is the defaulters committee and claim 9 any losses that may have incurred from defaulters. It was, thus, contended that upon expulsion of respondent no.3 by the operation of bye law 11 of the bye laws, the assets of respondent no.3 vests in the defaulters committee and accordingly the impugned communication was sent to the appellant to freeze the accounts.
12. The contention of respondent no.2 is, that the action of respondent no.1 in freezing the accounts of the respondent no.3 pursuant to the confirmatory order passed by the WTM is justified. It was contended that no prejudice has been caused to the appellant and that the bankers lien cannot eclipse the rights of innocent clients of respondent no.3 and that bankers lien, if any, can be invoked only when the dues of the clients are recouped. It was further contended that the proceeds of unlawful activities of respondent no.3 cannot be placed as a lien even if the same are deposited with the lending bank.
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13. Inspite of service of summons, no reply was filed by respondent no.3, nor any counsel appeared.
14. We have heard the learned counsel for the parties at some length. The short question that arises for our consideration is, whether NSE as a stock exchange could issue directions to a commercial bank (appellant) to freeze the bank account of respondent no.3 pursuant to the confirmatory order dated 24th November, 2020. Para no.31 of the confirmatory order prohibits respondent no.3 from alienating any of its assets expect with the prior permission of NSE till the settlement of claims of the investors. There is no embargo upon any other entity to proceed against respondent no.3 Karvy Stock Broking Ltd. Para no.32 of the confirmatory order directs the stock exchange to initiate appropriate action against Karvy Stock Broking Ltd for violation of their bye laws in accordance with law and further invite claims from the clients of Karvy Stock Broking Ltd. in accordance with its bye laws. Para no.31 of the confirmatory order gives direction to respondent no.1 11 NSE to initiate appropriate action against Karvy Stock Broking Ltd for violation of its bye laws and further allows NSE to invite and deal with the claims of the clients in accordance with its bye laws. We do not find any direction which allows NSE to issue the impugned communication holding that the funds lying in the bank account of Karvy Stock Broking Ltd are the assets of the defaulting committee.
15. Reliance of bye law 11 of Chapter XII of the bye laws of NSE has been taken to hold that the assets of the defaulter namely the funds lying in the bank account becomes the assets of the defaulting committee. In this regard, before we deal with the bye law 11 under Chapter XII of the bye laws of NSE it would be appropriate to refer to a few provisions.
16. Clause 17 defines „trading member‟ as "(17) "Trading Member" means a Stock broker and the member of the NSE registered in accordance with Chapter V of the Bye-Laws and will include such an entity which is permitted by NSE to enter into Tri-party Repo transactions on the TRM segment."
12Admittedly, appellant is not a trading member nor is registered with NSE.
17. Under Clause 1(c) of Chapter V of the bye laws a trading member is required to pay such fees, security deposits and other monies as may be specified by the stock exchange. Such deposit made by the trading member would be subject to a first and paramount lien for any sum due to the exchange and all other claims against the trading member. Clause 1(c) of Chapter V is accordingly extracted hereunder.
"1(c) The trading member shall pay such fees, security deposits and other monies as may be specified by the Board or the relevant authority from time to time, on admission as trading member and for continued admission. The fees, security deposits, other monies and any additional deposits paid, whether in the form of cash, Bank Guarantee, Securities or otherwise, with the Exchange, by a trading member from time to time, shall be subject to a first and paramount lien for any sum due to the Exchange and all other claims against the trading member for due fulfillment of engagements, obligations and liabilities of trading members arising out of or incidental to any dealings made subject to the Byelaws, Rules and Regulations of the Exchange. The Exchange shall be entitled to adjust or appropriate such fees, deposits and other 13 monies for such dues and claims, to the exclusion of the other claims against the trading member, without any reference to the trading member."
18. Based on the aforesaid clause, respondent no.3 while becoming a trading member of NSE has deposited securities and such other monies as specified by the stock exchange.
19. Chapter XII of the bye laws deals with the default committed by the trading member. Under Clause 1, a trading member can be declared a defaulter upon existence of certain contingencies as stipulated therein. Clause 11 provides vesting of assets of the defaulter in the exchange. Clause 11 is accordingly 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 14 any trading member as a defaulter, in the Exchange for the benefit 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 authorised persons of the defaulter, approved banks and any other persons as may be approved by the Defaulters' Committee and other recognised stock exchanges."
20. The aforesaid provision indicates that the defaulter committee shall call in and realise security deposit lying to the credit of and security deposited by the defaulter. The security deposit is that which has been deposited by respondent no.3 to the stock exchange. In addition, the defaulter committee shall recover all monies, securities and other assets due, payable or deliverable to the defaulter by any other trading member in respect of any transaction or dealing made. Such assets as stated aforesaid shall vest ipso facto in the defaulters committee. In our view, the vesting of the assets in the defaulters committee is limited and cannot include all the assets of respondent no.3 i.e. the defaulter. Only such security deposited with the stock 15 exchange vests with the defaulters committee. In addition, to the aforesaid, other monies, securities and other assets due, payable or deliverable to the defaulter by any other trading member also vest with the defaulters committee. That is the limited scope of Clause 11 of Chapter XII of the bye laws.
21. Bye law 12 makes it apparently clear that a defaulter committee can only issue directions against the trading member and cannot issue any direction to a third party, namely, the appellant who admittedly is not a trading member. For facility bye law 12 is extracted hereunder.
"(12)(a) All monies, securities and other assets due, payable or deliverable to the defaulter must be paid or delivered to the Defaulters' Committee within such time of the declaration of default as the relevant authority may direct. A trading member violating this provision shall be declared a defaulter.
(b) A trading member who shall have received a difference on account or shall have received any consideration in any transaction prior to the date fixed for settling such account or transaction shall, in the event of the trading member from whom he received such difference or consideration being declared a defaulter, refund the same to the Defaulters' Committee for 16 the benefit and on account of the creditor members. Any trading member who shall have paid or given such difference or consideration to any other trading member prior to such settlement day shall again pay or give the same to the Defaulters' Committee for the benefit and on account of the creditor member in the event of the default of such other member.
(c) A trading member who receives from another trading member during any clearing a claim note or credit note representing a sum other than a difference due to him or due to his constituent which amount is to be received by him on behalf and for the account of that constituent shall refund such sum if such other trading member be declared a defaulter within such number of days as prescribed by the relevant authority after the settling day. Such refunds shall be made to the Defaulters' Committee for the benefit and on account of the creditor members and it shall be applied in liquidation of the claims of such creditor members whose claims are admitted in accordance with these Bye Laws, Rules and Regulations."
22. Thus, we are of the opinion that respondent no.1 had no jurisdiction to hold that the funds lying in the account of Karvy Stock Broking Ltd are assets of the committee as per bye law 11 of NSE bye laws. We are further of the opinion that NSE does not get any jurisdiction to pass such order based on para nos.31 and 32 of the confirmatory order.
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23. The contention of SEBI that the proceeds of unlawful activities of respondent no.3 cannot be placed as lien even if the same are deposited with the lending banks cannot be accepted as it is not known whether the deposits in the bank accounts/fixed deposits are of client securities or is the exclusive monies of respondent no.3. In this regard, we find that the details are lacking. The contention of SEBI is not based on any documentary evidence. At the same time, the contention of the appellant that they could invoke bankers lien as per Section 171 of the Indian Contract Act also cannot be accepted as details in this regard are lacking. Further, this Tribunal is not the appropriate forum to adjudicate such disputes. We are further of the opinion, that the appeal is maintainable in as much as, the impugned order infringes the right of the appellant. The appellant being aggrieved by the order has a right to file an appeal.
24. In view of the aforesaid, the impugned communication issued by NSE dated 8th December, 18 2020 invoking bye law 11 of its bye laws is totally without jurisdiction and is quashed. The appeal is allowed with no order as to cost.
25. The present matter was heard through video conference due to Covid-19 pandemic. At this stage it is not possible to sign a copy of this order nor a certified copy of this order could be issued by the registry. In these circumstances, this order will be digitally signed by the Private Secretary on behalf of the bench and all concerned parties are directed to act on the digitally signed copy of this order. Parties will act on production of a digitally signed copy sent by fax and/or email.
Justice Tarun Agarwala Presiding Officer Justice M.T. Joshi Judicial Member RAJALA Digitally signed 29.11.2021 by KSHMI NAIR RAJALAKSHMI H RHN Date: 2021.11.29 H NAIR 16:22:43 +05'30'