Bourses Can’t Take Over Defaulting Broker’s Accounts, Rules Tribunal

The securities appellate tribunal (SAT) has ruled that stock exchanges have no powers to take control of the bank accounts of brokers in the event of the default.

The verdict comes at a time when banks and stock exchanges are embroiled in at least half a dozen cases on who gets access to funds of stock brokers or market institutions in case of fraud.

The verdict was delivered in the matter of the beleaguered Karly broking.

The Hyderabad based brokerage had allegedly misappropriated client securities and used then to avail of loans from banks for other business arms of Karly. SAT hears appeals in securities market cases.

In November last year, Sebi ordered impounding of Karly’s assets to provide compensation to defrauded investors. Based on this order, the National stock exchanges (NSE) issued directions on December 8.2020, saying that the bank accounts of Karly must become assets of NSE’s defaulter committee.

Private lender Axis Bank challenged NSE’s order in the SAT.

Axis argued that Karly owed it Rs 165 crore and the money lying in the accounts these dues. At that time, the brokerage had deposits of the tune of Rs 8.27 crore in Axis Bank.

“The impugned communication issued NY NSE dated 8th December 2020 invoking bye-law 11 of its bye laws is totally without jurisdiction and is quashed,” said SAT in an 18- page order dated November 29.

The crux of Axis Bank’s contention was that the private lender wasn’t market entity regulated by the National stock exchanges (NSE) or the securities and exchange board of India (Sebi) and the exchange had no powers to order the freezing of the bank accounts.

The development could impact the ability of exchanges and market regulator Sebi to recover dues of investors in cases of broker fraud, said legal experts. Banks are involved in a tussle with stock exchanges in similar cases such as that of BMA wealth advisors and IL&FS securities services.

“The SAT order amply makes it clear that exchanges cannot order freeze of bank deposits but there are still some grey areas left to be explored,” said a leading securities lawyer. “like what would happen if the same freezing orders come from Sebi and not NSE?”

Sebi is a quasi-judicial regulator which has powers equivalent to civil court, said lawyers said.

Similar Posts

Leave a Reply

Your email address will not be published. Required fields are marked *