Share pledging case: Securities Appellate Tribunal quashes NSE, CDSL orders against Kotak Mahindra Bank

The Securities Appellate Tribunal (SAT) has quashed orders passed by stock exchange NSE and depository CDSL against Kotak Mahindra Bank in share pledging case pertaining to Arcadia Share and Stock Brokers.

Quashing 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.

In February 2021, the NSE had directed the lender not to invoke the pledge of the securities till the ownership of the pledged securities are ascertained in the demat account of Arcadia Share and Stock Brokers.

Thereafter, CDSL imposed a debit freeze, prohibiting the lender from invoking the pledged shares and recovering its dues.

Following these orders, Kotak Mahindra Bank approached the appellate tribunal.

In its order, SAT said 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," it added.

Accordingly, in its ruling passed on August 24, SAT said, "impugned orders passed by the NSE and CDSL cannot be sustained and are quashed". 

In March 2008, Arcadia availed loan from Kotak Mahindra Bank on the basis of pledge of shares provided by it. In this agreement, it was expressly declared that Arcadia is the legal and beneficial owner of the securities and that the securities are not encumbered, in any manner.

Around December 2020, 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.

In the meanwhile, 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.