IL&FS Security fraud: SC asks NCL to release cash collateral of Rs 460 crore

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Published: August 28, 2019 1:08:48 AM

Earlier, the SC had asked Sebi as to why it should not be directed to probe IL&FS fraud and protect investors.

The case relates to a default by a broker Allied Financial Services, which carried out alleged fraud trades on behalf of its client Dalmia Bharat and this had resulted in a loss of Rs 460 crore.

In a case related to the IL&FS securities fraud, the Supreme Court on Tuesday directed the National Security Clearing Corporation (NCL) to release cash collateral of Rs 460 crore, extended by clearing broker IL&FS Securities Services, towards the F&O trade.

A Bench comprising Justices Mohan M Shantangoudar and Sanjiv Khanna said that “NCL will honour F&O segment contract which had matured on June 27 and has not been paid” in view of the apex court’s June 26 interim order that had stayed the payment obligation under the option contract issued by stockbroker Allied Financial Services till now.

In December, Allied Financial Services had sold long-dated call options on the NSE. Citi Mauritius, Morgan Stanley, BNP Paribas, etc had bought the contracts. The trade was guaranteed by NCL.

The SC Bench also vacated the interim order, “clarifying that the payments would be without prejudice to the rights and contentions of all the parties and subject to the final outcome and directions that this court would pass.” Besides, the judges gave an option to Novjoy Emporium, OCL India and Dalmia Cement East to “ask for conversion/sale/ encashment of the mutual funds which were purportedly furnished as a security by Allied Financial Services.” Similar option has been given to 44 other parties who had moved the Securities Appellate Tribunal (SAT).

“On the option being exercised, IL&FS Securities Services shall convert/encash the mutual funds, and the amount realised would be deposited in a fixed deposit in a Nationalised Bank for six months to earn maximum interest. The deposit would be in the name of IL&FS Securities Services and abide by further orders/directions of this court,” the Bench said in its interim order.
With regard to jurisdiction of Sebi, SAT and other related issues with regard to the fraud, the top court has left them open to be decided at the time of final hearing.

The case relates to a default by a broker Allied Financial Services, which carried out alleged fraud trades on behalf of its client Dalmia Bharat and this had resulted in a loss of Rs 460 crore.

While Dalmia has filed a case against Allied Financial, stating that it did not authorise the trades and the latter had “stolen” the securities, the responsibility of bearing the losses fell to IL&FS Securities (ISSL), which was the custodian and had cleared the trades. Since the collateral used by Allied was fraudulently obtained, Mumbai police’s Economic Offences Wing had frozen them which allegedly led Allied to default on its obligations.

Earlier, the SC had asked Sebi as to why it should not be directed to probe IL&FS fraud and protect investors. “Why are you shirking from this? Lot of third parties have played fraud. That is the allegation. As a market regulator, you have to decide it as you have adjudicatory powers as well,” the Bench said.

Sebi has moved the apex court against the SAT’s order claiming that it should not be asked to investigate the `460-crore IL&FS Securities case as it is beyond its jurisdiction to annul trades. It further said that the NCL should be rather asked to look into the matter.
SAT had last month directed Sebi to pass an order in the case of Allied Financial Services, which allegedly had fraudulently used mutual fund units it did not own as margins for derivative trades.

While Sebi had initially on February 27 ordered a forensic audit of 11 entities including Allied Financial and barred the latter from the securities market, it later changed its stance and said that it has no jurisdiction over trade annulments and NSE Clearing can do so. Even NSE Clearing has so far refused to do so.

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