The Securities Appellate Tribunal (SAT) has quashed the orders of the National Stock Exchange (NSE) and Central Depository Services Limited (CDSL) against Kotak Mahindra Bank in the Arcadia Share and Stock Brokers share pledging case.
Invalidating the directions, the appellate tribunal said that National Stock Exchange (NSE) and Central Depository Services (India) Ltd or CDSL had no powers to issue directions to a non-trading member.
As of February 2021, the NSE had instructed the lender not to invoke the pledge of the securities until the ownership of the pledged securities is verified in Arcadia Share and Stock Brokers’ demat account.
Prior-to, CDSL imposed a debit freeze, restricting the lender from invoking the pledged shares and recovering its dues.
Kotak Mahindra Bank approached the appellate tribunal, following these orders.
In its order, SAT held that respondent (NSE) as a stock exchange has jurisdiction only over its trading members and cannot issue any directions to any entity other than the trading member, including the appellant (Kotak Mahindra Bank).
”Similarly, the depository also cannot issue any direction against any other entity which is not within its jurisdiction nor can freeze the securities which were pledged in favour of the appellant. 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,” as said.
“Impugned orders passed by the NSE and CDSL cannot be sustained and are quashed,” said SAT, in its ruling passed on August 24.
Arcadia availed loan from Kotak Mahindra Bank on the basis of pledge of shares provided by it, on Around December 2020. In this agreement, it was explicitly declared that Arcadia is the legal and beneficial owner of the securities and that the securities are not encumbered, in any case.
Arcadia began to default its repayment obligations and accordingly the bank recalled the loan facility on February 15, 2021 and intimated Arcadia that they would be enforcing the pledged securities, around December 2020.
As NSE passed an order on February 4, 2021 advising the bank not to invoke the pledge of securities till the ownership of the pledged securities are ascertained in the stockbroker’s 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 the bank could not invoke the pledge.