You will recollect that the banks got drawn into the picture because they had funded Karvy Group against the shares pledged by Karvy. There is nothing wrong in pledging shares and raising money; the only problem in this case was that the shares did not belong to Karvy but to the clients of Karvy. The Karvy Stock Broking had illegitimately pledged the shares with the banks by first doing an off-market transfer of shares to Karvy Realty and then they had pledged shares with banks to raise the money.

On Monday, the NSE and the BSE suspended the trading license of Karvy Stock broking except for square of F&O positions. Then on Tuesday, SEBI instructed NSDL to reverse all the transfers of shares pledged by Karvy and credit the same to the rightful shareholders. One of the major lenders to Karvy, Bajaj Finance, approached the SAT against this SEBI order and SAT asked NSDL to stay further transfer of shares. But by then the bulk of the transfers to 83,000 out of the 90,000 share holders had already been completed.

On Wednesday, SAT struck down the demand by the banks and instead asked SEBI to take a final call on the bank lenders in the next couple of days. There are 3 interesting issues that may work against the lenders.

a) Firstly, pledging shares you do not own is illegitimate and the pledge may not really stand the test of legitimacy in the court of law. The shares rightfully belong to the investors and Karvy had no business to pledge these shares.

b) The banks already have a couple of options in front of them. Normally, where the lenders are not able to establish the trail link of the shares, they take an undertaking from the borrower that these shares are genuinely owned by them. The only recourse for the banks will be to call back the loans from Karvy immediately and refer the company to bankruptcy.

c) SAT is unlikely to give a decision on this issue except asking SEBI to reconsider and review it is decision. Lenders may not be on a sound footing here.

We will have to wait for the final outcome of this case by end of this week.