SAT sets July 17 deadline for Sebi in Allied Financial case

Regulator to hear all parties involved in plea by IL&FS Securities seeking annulment of trades

The tricky matter regarding the settlement of Nifty options contracts between clearing member IL&FS Securities Services, broker-cum-trader Allied Financial Services, and several other market participants, has landed before the Securities and Exchange Board of India (Sebi).
 
On Wednesday, the Securities Appellant Tribunal (SAT) remanded the matter to Sebi, directing the capital markets regulator to hear out all parties involved and pass a final order by July 17. 
 
According to the SAT’s directives, all parties involved have to submit their representation to Sebi by July 8. They can all then appear before the regulator for personal hearings between July 10 and July 16, before Sebi decides on how the calls will be settled. More importantly, the tribunal has stated that settlement of the derivatives trades will continue to remain in abeyance till July 22.
 
The case involves derivatives bets placed by the now-banned broker Allied Financial through clearing member IL&FS Securities, using fraudulently transferred mutual funds (MF) units worth Rs 365 crore belonging to Dalmia Bharat Cement, OCL India, and Novjoy Emporium, as collateral margins.
 
On December 26 and 27, Allied had sold Nifty option contracts that were scheduled to expire on March 28 and June 27, and pocketed an upfront premium of Rs 380 crore.
 
The MF units were placed as collateral by Allied to IL&FS Securities for these trades. As the collateral originally belonged to clients of Allied Securities, IL&FS Securities couldn’t liquidate the MF units to settle the derivatives trades that expired on March 28 and June 27.
 
On March 20, IL&FS Securities filed an application before Sebi, stating that it was a victim of fraud perpetrated by Allied Financial and the trades carried out by the broker should stand annulled. The regulator, on March 29, said the appropriate authority for annulment of the trade would be the National Stock Exchange (NSE), where the trades were carried out. 

 
On June 24, NSE Clearing, the clearing corporation arm of the bourse, rejected IL&FS Securities’ annulment plea, stating that it could do so only after the investigation on allegations of fraud was completed by authorities such as Sebi and the Economic Offence Wing (EOW).
 
IL&FS Securities then filed a special leave petition before the Supreme Court against NCL Clearing’s order. The apex court, while imposing a stay on the settlement of the trades, sent the matter to the SAT.
 
Meanwhile, the clients of Allied Financial — whose MF units were illegally transferred and placed as collateral for the Nifty options trade — have requested Sebi, the EOW and SAT that their units, which were transferred illegally to IL&FS Securities by Allied Financial, be restored to their demat accounts by annulling the trades.
 
On the other hand, the counterparties, including Citibank, contested the proposal to annul the trades, saying that for them, these were legitimate trades conducted on the stock exchange platform. Citibank argued before the SAT that the delay in settling the trades is putting the counterparties at a huge loss and also impacting client payouts.
 
The tribunal refused to take a call on whether the trades should be annulled or honoured, saying that Sebi was better placed to take the call.
 
“Whether a fraud has been perpetuated, or whether a trade should be cancelled on a preponderance of probability that a fraud has been perpetuated, is again a question which is required to be decided by an authority. It is not appropriate for this appellate tribunal to go into the question at this stage,” it said in an order on Wednesday, transferring the matter to Sebi.