SAT quashes Sebi order in opposition to HDFC Financial institution for invoking pledged shares


The Securities Appellate Tribunal (SAT) has quashed an order issued by the Securities and Change Board of India (Sebi) in opposition to HDFC Financial institution for invoking shares pledged by dealer BRH Wealth Advisor.

On January 21, 2021, the market regulator imposed a penalty of Rs 1 crore on the non-public sector lender for flouting instructions handed in an interim order dated October 7, 2019. Sebi additionally directed HDFC Financial institution to deposit Rs 159 crore together with 7 per cent curiosity.

HDFC Financial institution had challenged the Sebi instructions earlier than SAT.

“We’re of the opinion that the appellant (HDFC Financial institution) was justified in invoking the pledge made by the dealer BRH. Whereas invoking the pledge the appellants didn’t violate any path contained within the ex-parte advert interim order dated October 7, 2019,” SAT held.

The SAT judgement is essential as there are different lenders who’ve filed appeals in an identical instances.

The modus operandi contain brokers pledging shares belonging to their purchasers to avail loans from banks. Whereas banks argue that they weren’t conscious that shares have been wrongfully pledged, Sebi is of the view that banks ought to have accomplished extra due diligence.

Authorized consultants say the regulator might transfer the Supreme Courtroom in opposition to the SAT order.

On this explicit case, BRH had availed a mortgage in opposition to shares from HDFC Financial institution. On October 4, 2019, the brokerage defaulted on its obligations following which HDFC Financial institution recalled a mortgage price Rs 191 crore. As BRH didn’t repay the mentioned quantity HDFC Financial institution bought shares pledged by the dealer price 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 property.

Sebi held that the pledged shares bought by HDFC Financial institution was illegal and in opposition to the order handed dated October 7, 2019.

HDFC Financial institution argued that it was not conscious that BRH had wrongfully pledged shares belonging to its purchasers because it had expressly confirmed that the securities it had supplied whereas availing the mortgage services didn’t belong to its purchasers. The financial institution additionally argued that it wasn’t a celebration to the ex-parte ad-interim order dated October 7, 2019.

In the meantime, Sebi argued that its impugned order was additionally relevant to the property of BRH which have been pledged. The regulator additionally argued that HDFC Financial institution didn’t conduct ample due diligence to confirm the securities pledged in its favour really belonged to BRH.

Dismissing the argument, SAT mentioned, “It’s not the job of the appellant to determine as as to whether the securities are of the dealer or of its purchasers and it’s sufficient for the appellant to be told by the depository that the securities are within the identify of the helpful proprietor which within the instantaneous case was the dealer BRH. Thus, the discovering that the pledge created by the dealer was invalid and, consequently, the following invocation by the appellant was additionally unlawful is completely misplaced.”

Market consultants mentioned below the sooner share pledging system it was simpler for brokers to misuse consumer securities to avail mortgage services. This was doable as that they had the ability of lawyer (PoA) from purchasers.

In 2020, Sebi launched new pledging norms to stop misuse by such brokers and did away with the idea of PoA.

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