Karvy Stock Broking Limited vs National Securities Depository ...
2021 Latest Caselaw 4901 Bom

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       IN THE HIGH COURT OF JUDICATURE AT BOMBAY
           ORDINARY ORIGINAL CIVIL JURISDICTION

                WRIT PETITION (L) NO.5981 OF 2021

Karvy Stock Broking Limited                        ...Petitioner
     V/s.
National Securities Depository Limited & Ors.      ...Respondents
                                  ...

Mr. Vikram Nankani, Senior Counsel a/w. Vinay Chauhan, Harish Khedkar, Ms. Neha Sonawane, Ms. Dhwani Shah and Yash Kullarwar i/b M/s. Vis Legis Law Practise for the Petitioner.

Mr. Somasekhar Sundaresan a/w Ms. Aakanksha Saxena, Ms. Etika Srivastava i/b. M/s. Rashmikant And Partners for the Respondent No.1.

Mr. Zal Andhayarujina, Senior Counsel a/w. Mr. Kunal Dwarkadas, Mr. Rahul Dwarkadas, Ms. Silpa Nair, Ms. Juhi Bahirwani, Mr. Rahil Shah i/b. M/s Veritas Legal for the Respondent No. 2.

Mr. Virag Tulzapurkar, Senior Counsel with Mr. Sachin Chandarana, Mr. Rashid Boatwala and Mr. Pruthvi Dhinoja i/b Manilal Kher Ambalal & Co. for Respondent No.3.

Mr. Sagar Divekar a/w. Mr. Abhimanyu Mhapankar, Mr. Pratik Ingle for the Respondent No. 4.

Pratham Masurekar a/w. Aditya Shah i/b. R. V. Legal for the Respondent No. 5.

Mr. Mustafa Doctor, Senior Counsel a/w. Nimay Dave a/w. Aparna Wagle & Yash Garach i/b. Alliance Law for the Respondent No.6.

Mr. Vaibhav Charalwar i/b. Sandeep Maurya for the Respondent No.

7.

CORAM : A. A. SAYED & MADHAV JAMDAR, JJ

DATED : 18 MARCH 2021

P.C.:

The Writ Petition is fled by the Petitioner seeking the

following reliefs:

a. That this Hon'ble Court be pleased to declare the Sale and/or auction of the Demat and Trading Accounts by Respondent No. 1 to 5 unconstitutional and ultravires Article 14, Article 21 and Article 300A of the Constitution of Indian and/or the Depositories Act, 1996 and/or the SEBI Act, 1992 and/or Securities Contract (Regulation) Act, 1956.

b. That this Hon'ble Court be pleased to issue a writ of certiorari or a writ in the nature of certiorari or any other appropriate writ, order or direction under Article 226 of the Constitution of India calling for the complete information concerning the bidding process conducted by the Respondent Nos. 1 to 5 be pleased to quash and set aside the sale and/or transfer the Petitioner's DP and Trading Account to Respondent Nos. 6 to 7 respectively and thereby conducting an enquiry for the same.

c. That this Hon'ble Court be pleased to issue a writ of prohibition or a writ in the nature of prohibition or any other appropriate writ, order or direction under Article 226 of the Constitution of India restraining Respondent Nos. 1 to 5 from selling and/or disposing of and/or transferring and/or completing or confrming the process of selling/disposing of/transferring the Demat and Trading Accounts of the Petitioner to Respondent Nos. 6 & 7.

d. That pending the hearing and fnal disposal of this petition, this Hon'ble Court to restrain Respondent Nos. 1 to 5 from selling and/or disposing of and/or transferring and/or completing or confrming the process of selling/disposing of/transferring the Demat and Trading Accounts of the Petitioner to Respondent Nos. 6 & 7.

2. The Petitioner - Karvy Stock Broking Limited (KSBL) is a stock

broker and registered with the Security Exchange Board of India

(SEBI) and was a member registered with the National Stock

Exchange (NSE), the Bombay Stock Exchange (BSE) and the

Metropolis Stock Exchange India Ltd (MSEIL). The KSBL is also

registered as a Depository Participant (DP) and was a member with

the National Securities Depository Limited (NSDL) and Central

Depository Securities Limited (CDSL).

3. Based on an audit and inspection conducted from 1 st January,

2019, NSE prepared a Preliminary Report and submitted the same to

SEBI on 22nd November, 2019. It was found that KSBL had

pledged/misused its clients' securities and also misused the Power

of Attorneys (POAs) given to KSBL by its clients (BOs-Benefcial

Owners). On 22nd November, 2019, SEBI passed an ex-parte ad-

interim order against KSBL in the following terms:

a. KSBL is prohibited from taking new clients in respect of its Stock Broking activities;

b. The Depositories i.e. NSDL and CDSL in order to prevent further misuse of clients securities by KSBL, are hereby directed not to act upon any instructions given by KSBL in pursuance of power of attorney given to KSBL by its clients, with immediate efect;

c. The Depositories shall monitor the movement of securities into and from DP account of clients of KSBL as DP to ensure that clients' operations are not afected;

d. The Depositories shall not allow transfer of securities from DP Account No. 11458979, name KARVY STOCK BROKING LTD. (BSE) with immediate efect. The transfer of securities from DP Account No. 11458978 named KARVY STOCK BROKING LTD. (BSE) shall be permitted only to the respective benefcial owner who has paid in full against these securities under supervision of NSE; and

e. The Depositories and Stock Exchanges shall initiate appropriate disciplinary regulatory proceedings against the Noticee for misuse of client funds and securities as per their respective bye laws, rules and regulations"

4. KSBL fled an Appeal being Appeal (L) No. 579 of 2019 before

Security Appellate Tribunal (SAT) against the said order of SEBI

dated 22nd November, 2019. On 29th November, 2019 an order was

passed by the SAT directing SEBI to pass appropriate orders after

giving KSBL an opportunity of hearing.

5. On 2nd December, 2019, the Managing Director of NSE

temporarily suspended the trading operations of the KSBL as a stock

broker from all segments.

6. On 3rd December 2019, the KSBL fled Appeal (L) No. 587 of

2019 before SAT against the aforesaid order dated 2 nd December,

2019. SAT disposed of the Appeal of KSBL with liberty to fle an

Appeal as provided by Rule 13(A)(d) of NSE Rules. KSBL accordingly

fled an Appeal before Member and Core Settlement Guarantee Fuund

Committee (MCSGFuC) of NSE. On 6 th December 2019 MCSGFuC

disposed the Appeal and upheld the decision of temporary

suspension dated 2nd December, 2019. In the said order passed by

the MCSGFuC of NSE it was interalia noted -

(a) The KSBL had admitted that it had wrongly pledged its client's securities and secured funds on that basis;

(b) The funds were raised by KSBL were misused;

(c) Incorrect information have been provided by KSBL to the Exchange in the past.

7. On 23rd November, 2020, NSE declared KSBL as defaulter and

expelled KSBL from the membership of the Exchange. On 24 th

November, 2020 BSE also declared KSBL as defaulter and expelled

KSBL from the membership of the Exchange.

8. The KSBL fled an Appeal before SAT challenging the decision

of the NSE of expulsion as stock broker and declaring KSBL as a

defaulter which is stated to be pending. The said Appeal was fled on

01.03.2021.

9. On 24th November 2020 the Whole Time Members (WTM) of

SEBI vide its order confrmed the directions issued vide ex-parte

order dated 22nd November 2019. It was further directed that KSBL

shall not alienate any of its assets without the prior permission of

NSE, till the settlement of the claims of the investors or any order of

the Court or Tribunal. The Stock Exchanges and Depositories were

directed to initiate appropriate actions against KSBL and its Directors

in accordance with law.

10. On 25th November, 2020, CDSL and NSDL terminated the

participantship of KSBL as a Depository Participant (DP).

11. On 6th Fuebruary 2021, NSDL, CDSL, NSE, BSE and MSEIL issued

Circulars inviting bids (RFuQ) inter-alia stating that Demat Accounts

as well as Trading Accounts held by KSBL shall be transferred to

another depository participant/trading member. The bids were to be

submitted by 12th Fuebruary, 2021. The Circulars set out the details of

the Demat Accounts and Trading Accounts proposed to be

transferred, as follows:

Demat Accounts

Depository Number of demat Custody value as on accounts January 31, 2021 NSDL 723,160 28,38,33,29,56,808 CDSL 382,948 1,75,73,92,71,739

Trading Accounts

Exchange Number of registered UCC Accounts NSE 1156016 BSE 1125808 MSEIL 333,175

As per the Circulars a reserve price of Rs.100/- was fxed for

Demat Accounts and no reserve price was fxed for the Trading

Account. On 12th Fuebruary, 2021 NSDL, CDSL,NSE, BSE and MSEIL

issued Circulars extending the last date for submitting bids till 17 th

Fuebruary 2021. A Standard Operating Procedure (SOP) was

formulated to fnalize the bidding process. Under the SOP, the entire

bidding process was to be completed till 15th March, 2021.

12. On 23rd Fuebruary, 2021, the Respondent Nos. 6-IIFuL Securities

Ltd and Respondent No. 7-Axis Securities Ltd were declared as

successful bidders as Depository Participant and as Trading Member

respectively. An amount of Rs.140 crores is stated to have been paid

by the successful bidders viz. Respondent No. 6 and the Respondent

No. 7.

13. It is the case of the KSBL that the unilateral transfers of the

Demat Accounts and Trading Accounts held by various clients of the

KSBL (as a participant and stock broker) to other participants/stock

brokers by way of bidding process is completely arbitrary and

without any authority of law. According to the KSBL, there is nothing

to indicate how reserve price of Rs.100/- was fxed for the Demat

Account and how no reserve price was fxed for the Trading

Accounts. According to the KSBL, the sudden process of foating of

bids behind the back of the KSBL without following due process of

law and without putting the KSBL to any notice was a wrongful act

by the Respondent Nos. 1 to 5 and the entire bidding process was

carried out in a hasty manner and there is a serious question of

credibility of the whole process. According to the KSBL, the whole

exercise appears to be tailor-made to transfer the Demat / Trading

Accounts of KSBL to the handpicked rival participants/trading

members at a throw away price.

14. According to the KSBL, as per industry practice in the business

of Broking and DP, the companies on an average are able to get a

multiple of twelve times their Earning Before Interests, Taxes,

Depreciation and Amortization (EBITA). According to the KSBL going

by that, the valuation of the KSBL's Broking and DP business works

out to around Rs.816 crores (i.e. 12 x Rs.68 crores), whereas the

Respondent Nos. 1 to 5 in extreme haste and reckless manner, sold

the business of the KSBL at around Rs.140 Crore to Respondent Nos.

6 and 7 respectively as reported in the media. According to the

KSBL, there is no power under the Depositories Act, 1996 for CDSL

and NSDL to invite bids, conduct an auction and transfer and/or sell

and/or dispose the DP accounts without notice to KSBL and its

clients. According to the KSBL, even the Respondent Nos. 3 to 5 has

no power or authority under the Securities Contract (Regulation) Act,

1956 and SEBI Act, 1992 to sell and/or transfer the Trading Accounts

to any person. According to KSBL, there is gross misuse of powers by

the Respondents and the price determined is totally adhoc and

without reasonable basis and the entire process initiated vide notice

dated 6th Fuebruary, 2021 and which culminated on 24th Fuebruary,

2021 is arbitrary, irrational, unreasonable and violative of Articles

14, 21 and 300A of the Constitution.

15. We have heard learned Senior Counsel of the Petitioners and

learned Senior Counsel/Counsel for the Respondents and have

carefully perused the material on record

16. We may frst and foremost make it clear that in the present

Petition we are not concerned with the termination/expulsion of the

KSBL as KSBL has already fled an Appeal before SAT which is

pending.

17. We note that the tenders (RFuQs) were issued on 6 th Fuebruary,

2021 by Respondent Nos. 1 and 2 and Respondent Nos. 3 to 5

respectively. The successful bidders viz. Respondent No. 6 and

Respondent No. 7 were notifed on 24th Fuebruary, 2021. KSBL has not

explained the delay since 6 th Fuebruary, 2021 and has chosen to

remain silent and has fled the present Writ Petition only on 2 nd

March, 2021 after Respondent No. 6 & Respondent No. 7 were

declared as the successful bidders and had paid the entire bid

amounts on 25th Fuebruary 2021 towards transfer of Demat Accounts

and Trading Accounts respectively. In the circumstances, on this

ground alone, no relief can be granted to the Petitioner at this stage.

18. We also note that Appeal was fled by KSBL before SAT on 1 st

March, 2021 interalia against the order dated 23 rd November, 2020

passed by NSE of expulsion and declaring KSBL as a defaulter,

wherein the following reliefs were sought:

7. (i) To quash and set aside the Impugned Order dated November 23, 2020 passed by the Respondent Nos. 1. (Exhibit A of the Memorandum of the Appeal;

(ii) To quash and set aside; (a) the consequential directions issued by BSE and MSEIL (pursuant to the impugned order passed by NSE) expelling and declaring the Appellant as defaulters; and (b) the consequential directions issued by NSDL and CDSL (pursuant to the Impugned Order passed by NSE) terminating the Participantship of the Appellant with NSDL & CDSL.

8. Fuor interim order/reliefs:

(i) The efect, implementation and operation of the impugned order dated November 23, 2020 be stayed; and

(ii) Ad-interim order in terms of prayer (i) above.

However, the Appeal was not moved by KSBL seeking stay to the

impugned orders of expulsion/termination by

NSE/BSE/MSEIL/NSDL/CDSL.

19. We have been taken through the statutory framework

governing the Demat Accounts and Trading Accounts viz. SEBI Act

1992, Depositories Act, 1996, Securities Contract (Regulation) Act,

1956, SEBI (Depositories and Participants) Regulations 2018, SEBI

(Intermediaries) Regulation, 2018 and the relevant provisions of

Bye-Laws of NSDL, CDSL, NSE and BSE.

20. The relevant provisions of the Bye-Laws framed by NSDL in

exercise of powers conferred under section 26 of the Depositories

Act, 1996 are extracted hereunder:

6.5.4 CONSEQUENCES OF TERMINATION:

v) The Depository shall notify the Participant and other Participants and the Securities and Exchange Board of India within seven days of the termination of the Participant under Bye Laws 6.5.1, 6.5.2 and 6.5.3 above. The Participant shall inform all its Clients of such termination within a period of seven days from the date on which it receives notice of such termination.

vi) The Participant shall be required to meet all its outstanding obligations to the Depository while the Participant was acting as such and the Client shall have the option of either getting the securities held with the Participant transferred to another Participant, or get the securities rematerialised within thirty days from the date of receipt of intimation as mentioned in Bye Law 6.5.4 (v).

vii) In case Clients do not respond to the advise of the Participant as per Bye Law 6.5.4 (vi), the Participant may request the Depository to manage the accounts of such Clients on its behalf, on such terms and conditions as may be prescribed by the Depository, from time to time.

Provided further that the Depository may, on its own, decide to manage the accounts of the Clients of

the Participant(s) or may nominate one or more Participants to whom such accounts shall stand transferred.

Provided that no transactions in respect of the securities in such account shall be efected until such time as the concerned Benefcial Owner shall make an application and its acceptance by nominated Participant(s) as per Bye law 9.1.6 Provided however that the requirement of furnishing transaction statement including statement of accounts as per Bye Law 6.4.4 will not apply to the Client accounts, decided to be managed by the Depository.

21. The relevant provisions of the Bye-Laws framed by CDSL read

thus:

"Clause 5.5.4.7 - On termination of the agreement with a participant or on withdrawal by the participant from CDSL, every Benefcial Owner of that participant shall have the option of either getting his securities held with the participant transferred to another participant, or get the securities rematerialised. Notwithstanding anything stated above even after such termination, the participant shall act as a participant for the limited purpose of either getting the securities held with the participant transferred to another participant or get the securities rematerialised.

Clause 5.5.4.8. - Upon termination of the agreement with a participant, CDSL shall give notice in writing to all Benefcial Owners holding accounts with such participant calling upon the Benefcial Owners to have their accounts transferred to any other participant within 15 days from the receipt of such notice. In the event of there being any Benefcial Owners who have failed to have their accounts transferred to any other participant as aforesaid, CDSL shall nominate one or more participants to whom such accounts shall stand transferred for the time being provided however that

no transactions in respect of the securities in such account shall be efected until such time as the concerned Benefcial Owner shall have acknowledged receipt of and thereby shall have agreed to be bound by the DP-BO Rights and Obligations document, to such participant."

22. On a plain reading of the aforesaid provisions, we are of the

view that there are sufcient powers and authority under the Bye-

Laws vested in NSDL/CDSL to manage the accounts of the clients of

the KSBL and/or to nominate one or more Depository Participant to

whom the DP Accounts may be transferred on the termination of the

Petitioner as Depository Participant.

23. The relevant provisions of the Bye-Laws framed by NSE are

extracted hereunder:

"Vesting of assets in the Exchange (11) The Defaulters' Committee shall call in and realise the security deposits in any form, margin money, other amounts lying to the credit of and securities deposited by the defaulter and recover all moneys, securities and other assets due, payable or deliverable to the defaulter by any other Trading Member in respect of any transaction or dealing made subject to the Bye- laws, Rules and Regulations of the Exchange and such assets shall vest ipso facto, on declaration of any trading member as a defaulter, in the Exchange for the beneft of and on account of any dues of the Exchange, National Securities Clearing Corporation Limited, Securities and Exchange Board of India, other trading members, Constituents and registered sub-brokers of the defaulter, approved banks and any other persons as may be approved by the Defaulters' Committee and other recognised stock exchanges."

24. The relevant provisions of the Bye-Laws framed by BSE are

extracted hereunder:

"Vesting of assets in the Exchange (11) The Defaulters' Committee shall call in and realise the deposits in any form, margin money, other amounts lying to the credit of and securities deposited by the defaulter and recover all monies, securities and other assets due, payable or deliverable to the defaulter by any other member/constituent in respect of any transaction or dealing made subject to the Bye- laws, Rules and Regulations of the Exchange and/or all other assets/amounts/securities belonging to other parties which the Exchange may be entitled to realize and appropriate. All these assets shall vest ipso facto, on declaration of a member as a defaulter in the Exchange for the beneft of and on account of any dues or obligations of the defaulter to the Exchange, clearing corporation, SEBI, other members, Constituents, Investor Protection Fuund, approved banks and any other persons as may be approved by the Defaulters' Committee and other recognised stock exchanges in the manner provided in these Bye-laws and/or as may be prescribed by SEBI from time to time."

25. According to the Respondents, the role of the KSBL as a

Depository Participant was only of an agent and as intermediary

between NSDL/CDSL and clients, who are holding the Demat

Accounts with NSDL/CDSL through the KSBL and the role of DP is to

facilitate the opening of Demat Account (through system provided

by NSDL/CDSL), de-materialization of the securities and ofer

services connected with maintenance of ownership, records and

transfer of ownership of the securities in the records of NSDL/CDSL.

It is contented on behalf of the Respondents that KSBL has no right

over the Demat Accounts of the benefcial owners with the

NSDL/CDSL and such Demat Accounts are not the property of the

KSBL. It is contended that a Stock Broker merely acts as an agent of

his clients and executes trades on their behalf at the Exchanges and

KSBL has no right over the Trading Accounts of their clients.

26. NSDL, CDSL, NSE and IIFuL (Respondent No. 6) have fled

Afdavit-in-Reply. The relevant paragraphs of the Afdavit-in-Reply of

the NSDL read as follows:

9. Each and every customer of the Petitioner is free to move over to any other depository participant. Considering that the customers i.e. the investors in securities would be directly and vitally afected by cessation of the Petitioner's right to provide the services, and indeed considering that the Petitioner's inability to fund the dues owned by it to various customers and such customers are bleeding, and innovative approach has been adopted to get economic value for the beneft of the customers and indeed to the beneft of the Petitioner itself, by creating a framework of an auction which would bring value. Even if this approach had not been adopted, every single customer of the Petitioner can move the demat account (or for that matter a Broking account) to another service provider with not a single rupee accruing to the Petitioner in the process. Put diferently, a recognized service provider of depository services would cease to be one once the recognition is lost. The client would move to other service providers and there would be nothing left to the beneft of the expelled depository participant. In the instant case, it has been made clear

and is evident from the record that the proceeds of the "auction" would be used to pay the dues owned by the Petitioner to its customers. In short, where nothing would have been gained from the fight of customers, the current process enabled a cash fow, which would only go towards paying the liabilities of the defaulting and expelled Petitioner.

18. It is relevant to note that from the time of 22 nd November order, there has been a signifcant and continued depletion of the demat accounts of the Petitioner, which is evidenced from the following:

Tabular Chart indicating depletion in Number of Client's Demat Accounts held by Karvy with NSDL since 22 November, 2019 Dates Events Number of Reduction in Demat Number of Accounts Accounts 22-Nov-19 Ex-parte Interim 7,91,923 Order issued by SEBI 24-Nov-20 Confrmatory Order 7,52,416 39,507 issued by SEBI

Karvy as DP of NSDL 31-Dec-20 End of Month 7,37,092 14,615 31-Jan-21 End of Month 7,23,160 13,932 28-Fueb-21 End of Month 7,07,595 15,328 Total number of Demat Accounts closed by 84,328 Clients till 28 Fueb 2021

27. The relevant paragraphs of the Afdavit-in-Reply of the CDSL

read as follows:

19. It is pertinent to note that the aforesaid regulatory framework does not specify the mode and/or manner by which CDSL can transfer the demat accounts opened through a terminated depository participant. As such, the mode and/or manner in which the transfer may take place is left to the discretion of CDSL albeit with one very important caveat - that the transfer must be in the interest of benefcial owner (i.e. the holders of the demat accounts opened through a terminated depository participant in whom all rights of ownership of the securities placed in the demat account vest).

20. It is in the aforesaid background that CDSL, along with Respondent No. 1, 3, 4 and 5 have together, in exercise of their discretion based upon specialized and technical knowledge and know-how, devised the current method of transfer of the Demat accounts opened through a terminated Depository Participant by way of auction. The intent behind such a mode of transfer is to ensure that the highest value can be obtained by way of a formal, transparent and open bidding process so that the interests of the investors and/or benefcial owners are best served. The tender document / Request for Quote (Exhibit I to the captioned Petition) expressly states that the funds raised from the bidding shall be utilised to settle the claims of the investors and/or benefcial owners which were earlier serviced by terminated depository participant/expelled trading member. It is therefore, evident that the present mode/manner of transfer by way of auction is in keeping with the letter and spirit of the regulatory framework to ensure that the interest of the investors and/or benefcial owners are best served and protected.

22. I say that it was on account of the aforesaid provisions in the CDSL Bye-laws that CDSL alongwith NSDL (i.e. Respondent No. 1) and the Stock Exchanges (i.e. Respondent Nos. 3 to 5) mutually decided on a Standard Operating Procedure ("SOP") for the transfer of demat accounts serviced by a terminated depository participant and trading accounts serviced by a expelled trading member, taking into account the best interest of

the investors and/or benefcial owners and after consultation with SEBI on the concept. A copy of the correspondence exchanged between SEBI and Respondent Nos. 1 to 5 for the formulation of the SOP is hereto annexed and marked as Exhibit - C. A copy of the SOP is hereto annexed and marked as Exhibit - D.

25. I say that in addition to the fact that CDSL has the power to transfer the demat accounts of a terminated depository participant and in exercise of such power, formulate the SOP, it is also pertinent to note that the SOP was formulated by Respondent Nos. 1 to 5 after consultation with SEBI on the concept, with the overarching objective of ensuring continuity of service by the terminated depository participant/expelled trading member, and to ensure that any claims made by aggrieved investors and/or benefcial owners could be settled to the maximum extent possible.

26. I say that the primary objective for the formulation of the SOP was to address situation wherein claims made by investors and/or benefcial owners against terminated depository participants/expelled trading member are not settled due to insufciency of funds in the investor protections funds or pursuant to sale of assets of the terminated depository participant/trading member. I say that in light thereof, the SOP introduces a way to generate funds which could be used to settle a claims of any aggrieved investors and/or benefcial owner. The SOP also specifcally notes that Respondent Nos. 1 to 5 are only meant to be the facilitators of the process envisaged therein to evaluate and select the winning bidder for the demat accounts and the trading accounts.

27. I say that the transparency and fairness of the process in the SOP is explicit from the following:

(I) Detailed eligibility criteria have been set out for the bidders, including a minimum net worth and minimum experience requirement based on the number of demat

accounts/trading accounts which are to be transferred in order to ensure the fnancial and operational stability of the bidder in the best interest of the demat account holders;

(ii) Separate bids would be invited for the trading accounts and the demat account;

(iii) The bidders are required to be compliant with the securities laws and no adverse order should be in force against them;

(iv) The issuance of the request for Quote shall be published through circulars as well as on the website of the Respondent Nos. 1 to 5;

(v) The Reserve Price may be set by the Respondent Nos. 1 to 5 after mutual consultation and the same shall be disclosed in the circulars published; and

(vi) The evaluation of the bids shall be undertaken by a joint committee comprising of senior ofcials of the Respondent Nos. 1 to 5;

28. It is submitted that in addition to the aforesaid, the SOP also lays down how the funds raised from bidding process are to be utilised. I think that the SOP provides that the amounts received for the trading account and demat accounts shall, after adjusting the dues of the depositories, be placed in escrow account of the stock exchange for a period of 3 years during which period claims from investors shall be received and admitted by the stock exchange. Pertinently, the SOP also provides that in the event any funds remains from such bidding amounts, the same shall be transferred to the depository participant/trading members who was terminated/expelled.

have taken all steps in compliance with the process envisaged under the SOP, pursuant to which Respondent Nos. 6 and 7 have been selected as the successful bidders for the demat and trading account respectively. I say that CDSL has followed a fair and transparent process in the selection of Respondent Nos. 6 and 7 and has, all stage at all stage, adhered strictly to the terms and conditions of the SOP.

31. I further say that considering the Petitioner was a terminated as a depository participants of CDSL efectively from 26th November 2020, there has been absolutely no haste in the actions of the CDSL to transfer demat accounts serviced by the petitioner to another depository participant. I further say that Respondent Nos. 1 to 5 have carried out the process in envisaged in the SOP in a complete transparent manner by publishing all details in relation thereto, which has in fact been relied upon by the Petitioner in the captioned Petition. I say that the Petitioner has repeatedly tried to thwart any attempt made by the CDSL to ensure that the interests of the benefcial owners are protected.

32. I further say that the CDSL has ensured that the right of the demat account holders to be given an opportunity to shift their demat accounts to a depository participant of their choice, remains protected. Consequently, while CDSL has received the bid amount from Respondent No. 6 CDSL has issued a Nomination Letter to the Demat account holder on 1 st March 2021 granting them time till 15th March 2021 to indicate if they do not wish to transfer their demat account to Respondent No. 6. I say that on account of the Petitioner having been terminated as a depository participant after adequate opportunities of hearing been granted to the Petitioner, the Petitioner is not entitled to any hearing whatsoever before the demat accounts are transferred to Respondent No. 6. I, therefore, say that the contentions of the Petitioner that adequate notice has not been given to the Petitioner and a demat account holders is grossly incorrect and misleading.

33. In view of what has been stated hereinabove, it is submitted that despite the said SOP being created solely for the beneft of the investors and/or benefcial owners in order to give them continuous access to the securities market and provide funds to meet their claims, and the same been specifed in all the circulars and articles relied upon by the Petitioners, the Petitioner has fled captioned Petition to create hurdles in the

process of transfer of Demat account and trading account to Respondent Nos. 6 and 7 respectively, by merely making bald allegations of such transfer being purportedly illegal, arbitrary and unconstitutional. I say that such allegations of the Petitioner must be held to be without any substance whatsoever and the reliefs sought in the caption Petition ought to be rejected for forthwith.

35. I say that the Petitioner was a depository participants of CDSL who acted as an agent of CDSL and as an intermediary between CDSL and benefcial owners who held Demat accounts with CDSL through the Petitioner. I say that the role of the Depository Participant is to facilitate the opening of Demat account (through the system provided by CDSL), the dematerialisation of securities, and ofer services connected with the maintenance of ownership records and transfer of ownership of securities in the records of CDSL. I say that on account thereof the Petitioner had no right whatsoever on the demat account held by the benefcial owners with the CDSL and such Demat accounts cannot in any manner be considered as the 'property' of the Petitioner, as is sought to be claimed in the captioned Petition.

39. I say that in accordance with the CDSL Bye- Laws, CDSL issued a show-cause notice dated 10 th January 2020 to the Petitioner to show-cause as to why the Petitioner should not be terminated as a depository participant of CDSL. I say that after giving adequate opportunities to the Petitioner to respond to such show- cause notice, CDSL issued a termination notice on 25 th November, 2020, on account of various defaults including non-payment of dues of more that INR 80 Lakhs to CDSL. A copy of such termination notice is annexed with the captioned Petition as Exhibit - G therein. I further say that such termination has not been challenged by the Petitioner till date and has therefore, attained fnality.

28. The relevant paragraphs of the Afdavit-in-Reply fled by the

NSE reads as follows:

(ii) (h) Post December, 2019 NSE took several steps, including but not limited to the following, all in the interest of the investors.

1. Fuunds to the tune of Rs.76.16 Crores have been paid to 1,73,841 clients of Karvy in settlement of their accounts.

2. Securities to the tune of Rs.2,216,88 Crores have been paid to 1,39,525 clients of Karvy in settlement of their accounts.

3. Based on the SEBI confrmation order dated 24th November, 2020, NSE had issued directions to the relevant banks to freeze the bank accounts of Karvy so that the funds cannot be alienated by Karvy and can be met for the payment of claims of Karvy investors.

III The process initiated by NSE and other Authorities to transfer trading accounts to Karvy to another member is in accordance with the law:

(a) As per the SEBI circular of 1st July, 2020, SEBI is entitled, authorized and empower NSE and all Stock Exchanges to take appropriate actions and measures to recover the defcit amount from the defaulter members by liquidating its assets. The said Circular also empowers the Exchanges to approach the appropriate Court of law, if required.

(b) Fuurther, as per the Chapter XII of the Bye-laws of the NSE, title "defaulter", once a trading member is declared as a defaulter, the Defaulters Committee is entered to call in and realize all the securities deposit, security amounts and assets of the default members. If as mentioned in paragraph 25 the writ petition, the Demat accounts and Trading Accounts are of the property of the Petitioner (which is the Petitioner claims to

be), than the Defaulter Committee is entitled to receive the same and realise it in the manner deems ft and appropriate for compensation the clients of Karvy for the losses sufered by them. If the clients' assets belonging to Karvy's clients then Karvy can make no grievance if they are transferred. Such transfer has to be made in the interest of the clients to enable them to trade, otherwise they are blocked from trading. Even otherwise, the clients are always entitled to transfer their accounts from Karvy to any other party. So, Karvy cannot claim any vested or proprietorial right or interest in the clients accounts.

IV. As a result of the successful completion of the Request for Quotations, the clients of Karvy will beneft at large:

a) As per the request of Quotations of 6th Fuebruary 2021, the Respondents have received a

herein have been declared as successful bidders.

b) It should be noted that from 23rd November 2020 till now Karvy took no step to ask its clients to transfer their accounts, which Karvy ought to have done in the clients interest. Hence, the bidding process become necessary.

c) The said bidding process is completed and the Respondents have received to give an aggregate sum of Rs.11.75 crores to transfer of 11.15 Lakhs trading accounts of NSE, 11.25 lakh trading accounts of BSE and 3.33 Lakhs trading account of MSE.

d) In furtherance thereof, a Public Notice was also to be issued by NSE and other Respondents. However, on account of fling of the present Writ Petitions, issuance of Public Notice have been put on hold by NSE.

e) Accordingly, further action of NSE and other Respondents is only made with intent to protect the investors' interest. The amount

realized from the successful bidder, will be utilised by NSE towards settling the claims of the clients of Karvy. This will beneft Karvy itself. Had the clients themselves transferred their accounts (which they were entitled to do) no beneft would have accrued to Karvy at all.

29. Learned Senior Counsel on behalf of the Petitioner-KSBL interalia

submitted that the auction has resulted in a windfall for the Respondent Nos. 6

and 7. He submitted that the acquisition of the demat accounts and trading

accounts of KSBL ought to have fetched at least Rs. 816 crores going by the

EBITDA method of valuation. He pointed out that there were more than

11,00,000 demat accounts and more than 25,00,000 trading accounts (before

depletion). He pointed out that the annual maintenance of a demat account

charged by a Depository Participant is on an average Rs. 500/- and that itself

would add upto Rs. 55 Crore (11,00,000 X 500) annually for the demat

accounts only. He submitted that apart from that, Rs. 10-12 is charged for

each transaction. He submitted that the amount of Rs. 140 crores fetched at

the auction is a throwaway price considering the volume of the accounts and

custody value of the demat/trading accounts. He submitted that the entire

bidding process is arbitrary and there is a serious issue of credibility of the

whole process.

30. On behalf of the Respondents, it is submitted that the entire bidding

process was fair and transparent and that the EBITDA is a method of

valuation of a going concern, which is not applicable to KSBL's case as the

accounts are not the property of KSBL and that in any event KSBL has

already been declared a defaulter and expelled/terminated as a Trading

Member/Depository Participant.

31. It can hardly be disputed that KSBL had wrongly pledged the securities

of its clients and raised funds for its own benefit and had misused the Powers

of Attorney of its clients. Once KSBL was declared to be a defaulter and

expelled/terminated as a Trading Member of the Exchanges and as

Depository Participant, the demat accounts/trading accounts of the clients of

KSBL became inactive due to deactivation of trading terminals of KSBL.

Inasmuch as the demat accounts/trading accounts having been blocked from

trading, the clients of KSBL had no access to their own demat account/trading

account and no transactions could be carried out by them. The clients of KSBL

were thus left in a lurch. In these circumstances, the decision of the

NSDL/CDSL/NSE/BSE/MSEIL to undertake the process of nomination of

another trading member/depository participant in place of KSBL cannot be

faulted. Their action was only to protect the interest of the clients of KSBL,

whose interest is paramount. NSDL/CDSL/NSE/BSE/MSEIL had acted in

public interest. We also cannot fault the 'decision' of

NSDL/CDSL/NSE/BSE/MSEIL to invite bids from other Trading

Members/Depository Participants for acquisition of the demat accounts/trading

accounts of the clients of KSBL since the funds generated from the auction

are to be utilized to settle claims of aggrieved investors and/or beneficial

owners of the accounts which would in turn benefit KSBL as its liability would

reduce to that extent. Undoubtedly, the right of the demat account/trading

account holders to shift to another Depository Participant/Trading Member of

their choice remains intact and protected. Though we do not fault the

'decision' to invite bids, the matter needs to be examined only to the limited

extent of the auction process adopted and valuation.

32. It is conceded before that Court that this is the frst time such a

situation has arisen and there is no earlier precedent where bids

have been invited for the acquisition of the demat accounts/trading

accounts of a Depository Participant/Trading Member who has been

expelled/terminated. In the Afdavit in Reply of the NSDL, it is stated

that an innovative approach has been adopted to get economic value for the

benefit of the customers and for the benefit of KSBL itself by creating a

framework of an auction which would bring value and that it was mutually

decided by Respondent Nos.1 to 5 on Standard Operating Procedure (SOP)

for the transfer of demat accounts serviced by a terminated depository

participant and trading accounts serviced by an expelled trading member,

taking into account the best interest of the investors and/or beneficial owners

and after consultation with SEBI on the concept and that the SOP was

introduced to generate funds and further that the evaluation and selection

procedure has been done by a Joint Committee of Market Infrastructure

Institution.

33. We find that the Affidavits in Reply filed by NSDL/CDSL/NSE are bereft

of particulars of the auction process. There are no particulars in the Affidavits

in Reply as to how many bids were received in respect of the demat accounts

of NSDL/ CDSL and how many bids were received for the trading accounts of

NSE/BSE/MSEIL. There is no further bifurcation given of the auction price

fetched for the demat accounts and trading accounts. A reserve price of an

adhoc amount of Rs. 100/- per demat account was fixed in the tender (RFQ).

On what basis the reserve price was arrived at is not explained. Why no

reserve price was fixed for each trading account is not explained. There is no

valuation report of any expert shown to us or relied upon in the Affidavits in

Reply. It is only when the arguments were over and it was pointed out by the

Court that there are no particulars in the Affidavits in Reply about the auction

conducted and when the matter was kept today for orders, that a summary of

written arguments (undated) is tendered on behalf of CDSL which sets out

some particulars. We would like the same to be placed on record in the form

of an Affidavit. In the facts of the present case, it is not possible to accept the

contention on behalf of the Respondents that the demat accounts and trading

accounts would have no value as on their own showing an amount of Rs. 140

crores was fetched in the auction. Besides, so far as demat accounts are

concerned, NSDL/CDSL had attached a value themselves to the said demat

accounts by showing a reserve price of Rs. 100/- per account in the tender

(RFQ).

34. The subject matter of the Petition is about 25,00,000 trading accounts and

about 11,00,000 demat accounts of the investors/beneficial owners who were

the clients of KSBL. The custody value of the demat accounts alone as on 31

January 2021 is a mind-boggling figure of more than 3 lac crores. To satisfy

our judicial conscience, we are inclined to call for valuation report/s

notwithstanding the contention of the Respondents that the said demat

accounts and trading accounts cannot be valued. The learned Senior Counsel

for the Petitioners has fairly agreed to bear the fees of the Valuer/s.

35. Since KSBL is claiming infringement of its fundamental rights under

Articles 14 and 21 of the Constitution of India as also Article 300A in respect of

the auction process adopted by Respondent Nos.1 to 5 without notice and

behind their back, and since the auction process is not a subject matter of

challenge before any forum, it cannot be said at least at this stage, that this

Court ought not to examine the case of KSBL and it be relegated to SEBI/SAT,

which learned Senior Counsel for KSBL submits is not an alternate efficacious

remedy. The fact that KSBL is a defaulter and has been expelled/terminated

as a Trading member/Depository participant cannot be a ground to discard the

case of KSBL, at the threshold, when it is an admitted position that the price

which is fetched in the auction would ultimately benefit the investors and/or

beneficial owners of the accounts and is to be utilized towards settlement of

their claims against KSBL and the liability of KSBL would reduce to that

extent. In the facts of the present case, the judgments in Haji T.M.Hasan

Rawther v/s. Kerala Financial Corporation, (1988) 1 SCC 166 and

Michigan Rubber (India) Ltd. v/s. State of Karnataka & Ors., (2012) 8 SCC

216 relied upon by learned Senior Counsel on behalf of CDSL would not

assist the Respondents.

36. Let the Respondents fle comprehensive Afdavits-in-Reply

with regard to the auction process and valuation of the demat

accounts and trading accounts. At this stage, subject to further

orders, by way of ad-interim relief, we pass the following order:

ORDER

(i) The ad-interim relief seeking to restrain Respondent Nos.

1 to 5 from completing or confrming the process of

transferring the Demat and Trading Accounts held by KSBL to

Respondent Nos. 6 & 7 and for further steps being taken by

Respondents Nos.6 & 7, is rejected.

(ii) We appoint SBI Cap Markets Ltd. as well as KPMG LLP, as

Valuers, who shall submit their separate Valuation Reports in

respect of valuation of the demat accounts and trading

accounts of the clients of KSDL as on the date of tender(RFuQ)

as well as on the date of Valuation Report (after depletion of

accounts). We deem it appropriate to call for two Valuation

Reports considering the complexities involved in the valuation

and as we have been told that such exercise of auction or

valuation of the demat accounts and trading accounts has

never been carried out earlier. Since it is contended on behalf

of the Petitioners that there can be no valuation arrived at, we

make it clear that it would be open for the Valuers to say so in

their Valuation Report. It will be open for the parties to suggest

to the Valuers the method to valuation that can be applied. The

Valuers shall however arrive at their own independent

assessment and valuation. Let such Valuation Reports be

submitted before the next date. We record the statement of

the learned Senior Counsel on behalf of KSBL that KSBL shall

pay fees of the Valuers.

(iii) All the parties shall co-operate with the Valuers in

furnishing all necessary data to the Valuers till the time the

Valuation Reports are submitted.

(iv) The bid amounts paid by Respondent Nos 6 & 7 pursuant

to the auction, shall be held by NSDL/CDSL/NSE/BSE/MSEIL as

deposit and shall not be dealt with until the next date.

(v) Respondents Nos.6 & 7 shall keep accounts of the

investors/benefcial owners including any transactions

efected.

(vi) We, however, make it clear that there is no question of

stay to any further transfer of the demat/trading accounts of

the investors/benefcial owners from Respondents Nos.6 & 7 as

Depository Participant/Trading Member, to another Depository

Participant/Trading Member as that is always the prerogative

and option of the investors/benefcial owners.

(vii) NSDL/CDSL/NSE/BSE/MSEIL shall closely monitor the

accounts transferred to Respondent No.6-IIFuL Securities Ltd.

and Respondent No.7-Axis Securities, so as to ensure that the

interest of the account holders is protected and they are well

informed of their right to have a Depository Participant/Trading

Member of their choice.

37. List the Petition on 3rd May 2021.

(MADHAV JAMDAR, J.)                               (A.A.SAYED,J.)