Security and Exchange Board of India (SEBI): G. Mahalingam (Whole Time Member) imposed a penalty of Rupees One Crore on HDFC Bank for acting in contravention with the interim order passed by SEBI in BRH Wealth Kreators Ltd.
On 07-10-2019, SEBI had directed BRH to immediately desist from undertaking any activity in the securities market and also prohibited it from disposing of or alienating any assets except with prior permission of NSE and BSE. Further, the depositories and banks were directed not to make debits from the Demat accounts/bank accounts of BRH. Contrary to the aforesaid directions, BRH had availed LAS facility from HDFC by way of pledging securities from two Demat accounts and as on 20-09-2019, the total securities pledged from the said accounts amounted to Rs 158.68 Crore. On 14-10-2019, HDFC had invoked securities pledged by BRH to the extent of Rs 158.68 Crore without giving the requisite notice of 5 days to the clients of BRH, thus, depriving them of a fair opportunity to claim back their securities. It was also alleged that HDFC had failed to exercise due diligence while extending credit facilities to BRH without verifying the net worth vis–a–vis the number of credit facilities extended.
In reply to above-mentioned allegations, HDFC argued that the impugned order of SEBI was bereft of jurisdiction and was an instance of regulatory overreach into the HDFC’s regular banking business. It was contended that a suit praying for a decree of a mandatory injunction for return of the securities on which the pledge was invoked by HDFC Bank was already pending in Calcutta High Court. Hence, the matter pertaining to invocation of the pledge of securities was clearly sub judice before a Civil Court of competent jurisdiction and the High Court, being a higher forum, SEBI ought not to take cognizance of the instant matter till disposal of the proceedings in the said High Court.
The Board, while relying on Krishnadevi Malchand Kamathia v. Bombay Environmental Action Group, (2011) 3 SCC 363, wherein the Supreme Court had held, “whether an order is valid or void, cannot be determined by the parties. For setting aside such an order, even if void, the party has to approach the appropriate forum” stated that if HDFC’s right to recover its dues from BRH was affected on account of the interim order, it could have approached a court of competent jurisdiction before such conscious avoidance of the said Order. Considering that, the Board held that the invocation of pledge of client securities available in the two Demat accounts of BRH, by HDFC, was not in conformity with the directions contained in the Interim Order. While observing the legal position, SEBI stated, “It is a settled legal position that even if an order is void, it requires to be so declared by a competent forum and it is not permissible for any person to ignore the same merely because in his opinion the order is void.”
Consequently, HDFC was directed to deposit an equivalent amount of Rs 158.68 Crore along with interest from 14-10-2019 at the rate of 7% per annum in a separate interest-bearing Escrow Account. It was also held that HDFC had consciously proceeded to defeat the directions in the Interim Order, therefore, a penalty of Rs One Crore was imposed in terms of Section 15HB of the SEBI Act, for non–compliance with the Interim Order. [BRH Wealth Kreators Ltd.–HDFC Bank Ltd., In Re., 2021 SCC OnLine SEBI 7, decided on 21-01-2021]
Kamini Sharma, Editorial Assistant has put this story together