SAT put Stay on SEBI's order Against HDFC Bank in BRH Wealth Kreators case
The Securities Appellate Tribunal (SAT) has stayed a SEBI order which imposed a fine of Rs. 1 crore on HDFC Bank for invoking securities pledged by stock broker BRH Wealth Kreators, till further orders.
The regulatory body - Securities and Exchange Board of India (SEBI) - on 21 January 2021, imposed a fine on HDFC Bank and also directed the bank to transfer Rs. 158.68 crore along with 7% interest per annum into an escrow account till the issue of settlement of clients' securities is reconciled.
The Securities Appellate Tribunal (SAT) put a stay on SEBI's order. The proceeding was initiated by the SEBI on account of non-conformity by HDFC Bank. The order of the SEBI contained certain directions in the interim order against BRH Wealth Kreators and other entities on 7 October 2019.
The Appellate Tribunal in its order dated 19 February 2021 directed the SEBI to file a reply within three weeks. It added that "The fact that the circulars have been violated or not and whether the securities have been rightly invoked by the appellant requires consideration."
In its order, the appellate tribunal noted that HDFC Bank is one of the largest private sector banks and as per the balance sheet it has assets of Rs. 1,654,228 crore. Hence, the bank has sufficient financial strength and can furnish the amount according to the impugned order.
The Tribunal further added that the case will not be the same where the bank will run away or will become insolvent. It stated, "We accordingly stay the effect and operation of the impugned order till further orders of the Tribunal subject to the condition that appellant will give an undertaking to SEBI that they will abide by the result of the appeal and the directions given therein within four weeks from the date of the disposal of the appeal. Such undertaking shall be given by a responsible officer of the appellant to be filed before SEBI within two weeks from today."
The Tribunal observed that "At some length prima facie we find that an ex parte restraint order dated 7 October 2019 does not operate against the appellant (HDFC Bank)."
In the interim order, it was noted that BRH has pleaded certain securities however no restraint order was directed against the appellant restraining them from enchasing the pledged securities.
The Tribunal observed that it has been specifically asserted that the securities so pledged were that of BRH and was not of BRH clients and therefore there has been no violation of the SEBI's circular which has been issued from time to time.
The regulatory body (SEBI) gave directions to BRH to cease and desist from undertaking any activity in the securities market and further, its assets would be utilized only for payment of money or delivery of securities, as the case may be, to the clients or investors under the supervision of the concerned exchanges or depositories.
The SEBI in its order noted that the expression 'assets' would apply to all properties of BRH, which would also comprise of securities, that were pledged by it against which funds were raised from HDFC Bank and other financial institutions. It furthers the depositories and banks for not initiating any debits from demat and bank accounts of BRH.
The SEBI found that on 14 October 2019, the HDFC Bank invoked the pledge of securities to the extent of Rs 158.68 crore and thereafter, sold most of the securities and appropriated the sale proceeds towards the outstanding under the various credit facilities advanced by the bank to BRH. The private sector lender had granted credit facilities to BRH and BRH Commodities aggregating to Rs 191.16 crore and Rs 26.61 crore, respectively.
In the order dated 21 January 2021 the SEBI's Whole Time Member G Mahalingam stated that "I find the invocation of the pledge of client securities available in the two demat accounts of BRH by the noticee (HDFC Bank), was not in conformity with the directions contained in the interim order."