Share pledging case: SAT quashes order against Kotak Mahindra Bank | The Financial Express

Share pledging case: SAT quashes order against Kotak Mahindra Bank

It was also contended that the appeal had become infructuous as a forensic report indicated that the client’s securities were illegally pledged by the broker.

Share pledging case: SAT quashes order against Kotak Mahindra Bank
The depositories can take action against the defaulters of the stock exchange and freeze the assets of the defaulters to the extent of the assets which are not encumbered, it said.

The Securities Appellate Tribunal (SAT) has quashed orders passed by the National Stock Exchange of India (NSE) and Central Depository Services (CDSL) asking Kotak Mahindra Bank (KMB) not to invoke shares pledged by Arcadia Share & Stock Brokers.SAT, in its order dated August 24, observed that NSE as a stock exchange had jurisdiction only against its trading members and cannot issue directions to any other entity that is not the trading member.

Similarly, CDSL cannot issue a direction against any other entity which is not within its jurisdiction nor can it freeze the securities which were pledged in favour of the appellant (Kotak Mahindra Bank). The depositories can take action against the defaulters of the stock exchange and freeze the assets of the defaulters to the extent of the assets which are not encumbered, it said.

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Kotak Mahindra Bank had entered into a pledge with Arcadia Share & Stock Brokers in March 2008. The loan given by the bank was renewed and modified from time to time.Around December 2020, Arcadia began to default on its repayment obligations, prompting the bank to recall the loan facility on February 15, 2021, and intimate Arcadia that it would be enforcing the pledged securities.

In the meantime, NSE issued an order dated February 4, 2021, advising the bank not to invoke the pledge of securities till the owner of the pledged securities was ascertained in the stock brokers’ demat accounts. Based on the direction of NSE, CDSL issued an order on February 8, 2021, freezing the demat account of Arcadia, as a result of which the bank could not invoke the pledge.

Following these orders, Kotak Mahindra Bank approached the appellate tribunal.The lawyers for NSE had argued that the exchange had to not only comply and enforce the regulations and circulars framed by Sebi but was also required to frame its bye-laws, rules and regulations. This gave it powers to initiate any action as may be necessary to protect investor interest.

It was also contended that the appeal had become infructuous as a forensic report indicated that the client’s securities were illegally pledged by the broker.

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