Move National Securities Clearing Corp for trade annulment: SAT tells IL&FS

The Securities Appellate Tribunal Wednesday directed IL&FS Securities Services to approach National Securities Clearing Corporation regarding its plea for annulment of certain trades that were executed for stock broker Allied Financial Services.

IL&FS Securities, a clearing member, had contended that settlement of trades were done on the basis of fraudulently transferred collateral by Allied Financial and sought annulment of certain trades.

In its 16-page order, the tribunal also said that Sebi cannot deny IL&FS Securities the opportunity to be heard as it was a party affected by the irregularities committed by Allied Financial.

IL&FS Securities is part of crisis-hit IL&FS group.

In November 2017, both entities entered into a clearing member-trading member agreement, wherein Allied was obligated to place the margin with IL&FS Securities. The latter was clearing the trades of Allies in Futures & Options (F&O) segment of the National Stock Exchange.

The mutual funds provided by Allied were transferred to IL&FS Securities Services' demat account and then to the approved custodian account of NCL, earlier known as National Securities Clearing Corporation.

The issue pertains to Allied selling certain F&O contracts on Nifty in December 2018 and it was alleged that Allied also received an upfront premium of around Rs 380 crore. IL&FS Securities was required to clear the contracts using the mutual funds.

Before the mutual funds could be utilised, Sebi passed an order in February 2019 against Allied and other entities for various irregularities.

Mutual funds of Novjoy Emporium Private Ltd, OCL India Ltd and Dalmia Cement East Ltd were alleged to be illegally transferred by Allied to IL&FS Securities Services as a collateral for margins of Allied. In this case, the Economic Offence Wing (EOW) directed IL&FS Securities not to deal with the securities till further orders.

The EOW's direction has been challenged by IL&FS Securities before the Delhi High Court.

IL&FS Securities moved the tribunal after Sebi rejected its plea to modify the February order passed against Allied and other entities.

In its appeal, IL&FS Securities also sought annulment of the trade undertaken by Allied in December 2018.

The counsel for IL&FS argued that the firm was vitally affected and, therefore, proactive measures were required to be considered immediately otherwise the IL&FS Securities would become bankrupt.

Noting that IL&FS Securities is a clearing member and not a trading member, the tribunal asked the company move an appropriation application to National Securities Clearing Corporation for annulment of the trade.

"If such an application is filed, the said clearing corporation will decide the matter at the earliest after hearing all concerned parties," it noted.

Sebi's ex-parte interim order against Allied Financial and other entities had observed that Allied Financial committed various violations by misappropriating clients securities which need to be returned.

"Such securities were given to the appellant (IL&FS Securities) as collateral to square off the trades of Allied.

"In our view, the appellant is an affected party. We thus, leave it as that and hold that in the event the appellant applies for being heard and for protection of its interests the Whole Time Member of Sebi cannot deny the opportunity of it being heard," the tribunal said.