In October, 2019, Sebi had barred BRH Wealth Kreators from the market.The regulator had also directed depositories and banks not to make debits from the demat and bank accounts of the stock broker.
HDFC Bank had granted credit facilities worth Rs 191.16 Crore to BRH and Rs 26.61 Crore to BRH Commodities, out of which an amount of Rs 87.75 Crore was granted as LAS(loan against securities).
On October 14, 2019, HDFC Bank had invoked securities pledged by BRH to the extent of Rs 158.68 Crore.
The invocation of pledge of client securities available in the two demat accounts of BRH, by HDFC Bank, was allegedly not in conformity with the directions contained in the interim Order, the Sebi order said.
BRH was permitted to only pledge securities of debit balance clients or clients having indebtedness to BRH at the time of creation of such pledge, it said.
“It was alleged that as HDFC Bank did not conduct adequate due diligence to verify that securities pledged in its favour actually belonged to clients of BRH having debit balance at the time of creation of pledge, the pledge created on the securities.. was invalid and the subsequent invocation of such pledge by HDFC, was therefore illegal. Had the pledge not been invoked, the securities belonging to clients would have been available for restitution/settlement of claims of the clients of BRH,” Sebi whole time member G Mahalingam said in his order.
Lawyers representing the bank submitted to Sebi that the bank had invoked the pledge of securities on October 15, 2019 and thereafter sold most of the said securities and appropriated the sale proceeds towards the outstanding under the various credit facilities advanced by HDFC to BRH.
Since HDFC was owed amounts under multiple facilities, the bank was entitled apply and appropriate proceeds of sale of securities provided under the LAS Facility towards its dues in respect of other facilities.
This was in accordance with the bank’s right of general lien and set off as afforded under law, which right is expressly reserved in the relevant loan documents executed with BRH.
“I am of the considered view that the Noticee(HDFC Bank) had consciously invoked the securities pledged by BRH, thereby defeating the directions contained.. in the Interim Order,” Sebi Member G Mahalingam said.
The regulator has also asked the private sector bank to keep the Reserve Bank of India informed about the order within a week.