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SAT order in the matter of IL&FS Securities

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On May 15, the Securities Appellate Tribunal (SAT), issued an order in the matter of IL&FS Securities Services Limited (ISSL) v. SEBI. This matter relates to the ongoing investigation (by SEBI and Economic Offences Wing) into the allegations of illegal stealing of securities worth hundreds of crores by a SEBI-registered trading member, Allied Financial Services Private Limited, from its various clients, including Dalmia Bharat Limited. These stolen securities were used as collateral and an upfront premium of Rs. 380 crore was received by Allied for taking positions in the futures & options (F&O) segment of stock exchanges. ISSL was acting as a clearing member for Allied.

In light of the ongoing investigation by SEBI, ISSL requested SEBI: i) for annulment of the F&O positions taken by Allied which were maturing in June 2019, as the securities could no longer be utilized for settlement of trades till the completion of investigation; and, ii) to implead ISSL in the ongoing proceedings against Allied. However, SEBI rejected both these requests.

SAT while discussing the concept of annulment, stated that annulment of trades can be done in either of the two circumstances: i) when orders have been placed by mistake – erroneous trades; or, ii) in cases of willful misrepresentation or fraud. Further, both stock exchanges and clearing corporations have powers to do so, either suo motu or on a request made by its respective trading / clearing member. In the instant matter, SAT directed ISSL to approach NSE Clearing Corporation with its request for an annulment. Herein, it must be noted that although the power of annulment forms a part of the bye-laws of clearing corporations, however, they have never been exercised. In practice, it is always a stock exchanges’ decision to annul the trades.

With regard to ISSL’s locus standi in the ongoing proceedings against Allied, SAT held that any party which is affected directly or indirectly has a right to apply for a modification of the order. In the instant matter, the securities under investigation were given as collateral to ISSL to square off the F&O positions taken by Allied. Hence, ISSL was an affected party and should be heard. This order of SAT expands the ambit and interpretation of the term ‘aggrieved party’ and gives due representation to the affected entities of a dispute.

* Finsec Law Advisors is representing Dalmia Bharat Limited in this matter.