SAT quashes NSE order against Kotak Mahindra Bank in share pledging case

Says stock exchange only has jurisdiction over trading members and cannot issue directions to other entities

The Securities Appellate Tribunal (SAT) has quashed orders passed by the National Stock Exchange (NSE) and Central Depository Services (CDSL) directing Kotak Mahindra Bank not to invoke shares pledged by Arcadia Share & Stock Brokers.

In February 2021, the NSE had restrained the private sector lender from invoking and selling securities pledged by the brokerage until the rightful ownership of the securities was ascertained. The CDSL had then put in place a debit freeze, prohibiting Kotak Mahindra Bank from invoking the pledged shares and recovering its dues. The bank then moved SAT, challenging this.

The SAT in its order said, “we are of the opinion that respondent (NSE) as a stock exchange has jurisdiction only against its trading members and cannot issue any directions to any other entity including the appellant (Kotak Mahindra Bank) who is not the trading member. 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.”

The case

In March 2018, Arcadia had availed of a loan from Kotak Mahindra Bank by pledging shares. In its agreement with the bank, Arcadia had expressly declared that it was the legal and beneficial owner of the securities and that they are not encumbered in any manner.

Around December 2020, Arcadia began to default on its repayment obligations, following which Kotak Mahindra Bank recalled the loan facility on February 15, 2021, and informed the broker that it would enforce the pledged securities.

In the meantime, the NSE passed an order on February 4, 2021, advising Kotak Mahindra Bank not to invoke the pledged securities till their ownership was ascertained in the stockbrokers’ demat accounts. The move came amid allegations that Arcadia had wrongfully pledged its client securities with lenders to avail loans.

The legal counsels of Kotak Mahindra Bank had argued before the SAT that the NSE had no jurisdiction to restrain it from invoking its pledge as it was not a trading member and, hence, was not bound by the NSE’s rules. On the other hand, the NSE’s counsel argued that it had the power to initiate action to protect the interest of the investors.

In the meantime, a forensic report had revealed that the clients’ securities were indeed illegally pledged by the broker. However, the tribunal held that the NSE and the CDSL had no powers to issue directions to a non-trading member.

Earlier, the SAT had issued similar orders against HDFC Bank and Axis Bank, siding with the lenders in the illegal share pledging cases.


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