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Karvy issue puts a question mark on the concept of loan against shares, says Crosseas Capital’s Rajesh Baheti

Updated : December 03, 2019 01:10 PM IST

The Karvy issue deepens after one of the lenders, Bajaj Finance, is understood to have moved the Securities Appellate Tribunal (SAT) against NSDL's decision to transfer securities back to clients.

Rajesh Baheti, MD of Crosseas Capital Services, spoke at length about the issue to CNBC-TV18. “Twenty years ago, we did away with physical settlement in terms of physical shares and moved to demat and we thought the concept of bad delivery had ended,” said Baheti.

“The move to transfer those securities shows we have moved back into a regime where even demat shares can be bad delivery and this opens up a big question into everything else; it is not just borrowing against stock. It could be some client coming in and selling his stock and now it begs a question as to every time a client comes to sell a share, are we supposed to look at whether he is the owner of the share or not that he sells. I believe SAT has stayed transfer of more securities. Now the question is again – was the client’s contract with Karvy or was the client’s contract with the bank?” he pointed out.

“As is the general understanding, Karvy’s contract was with the client and if anybody owes money to the clients or shares to the clients, it should be Karvy. Now Sebi has ordered the banks to return the shares or rather suo moto ordered NSDL to transfer those shares from the banks’ pledged account into the clients’ account and that leaves banks with nothing on hand. Therefore, it’s tricky in terms of what happens legally,” Baheti added.

Speaking about protecting lenders’ interest, Baheti said, “It is clear that Karvy is definitely at fault. Karvy committed a crime. I think Karvy should be punished for it. I don’t think the banks committed a crime. So in this case, the banks are getting the punishment for a crime committed by the broker.”

“I think very soon the RBI will step into this because the regulator for the lenders is the RBI and they are going to go back to the RBI and say, you started this product called loan against shares and we lent in good faith and if that good faith cannot be honoured, then why should we even offer a product like that. So it has wider ramifications in terms of how the RBI interprets this whole thing and whether we get into a tussle between two regulators and the entire concept of loan against shares which is such a big portfolio,” added Baheti.
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