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Supreme Court questions Sebi on IL&FS fraud probe

FE Bureau
Supreme Court, Sebi, IL&FS fraud probe, ilfs news, ilfs crisi, ilfs  case, industry news, NSE

The Supreme Court on Monday asked Sebi as to why it should not be directed to probe IL&FS fraud and protect investors. While extending its earlier order that stayed payment obligations till August 13, the next date of hearing, a Bench comprising justices Mohan M Shantanagoudar and Sanjiv Khanna said that the market regulator should look into the issue as it also has adjudicatory powers.

“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. It also told senior counsel Arvind Dattar, appearing for Sebi, that “to protect society, we can direct you. You are saying regulations doesn’t give you jurisdiction to do so... but regulations are made by you. Does your regulations then require a change? “People/investors have confidence in you. You are the boss,” the judges said.

Sebi has moved the apex court against SAT’s order claiming that it should not be asked to investigate the Rs 460-crore IL&FS Securities case as it is beyond its jurisdiction to annul trades. It further said that the NSE clearing corporation should be rather asked to look into the matter. On June 24, the apex court had halted Rs 435 crore payment by IL&FS subsidiary until SAT and Bombay High Court passed an order in the alleged fraudulent claims.

The Securities Appellate Tribunal had earlier this 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. 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. The option contracts purchased by Allied had expired on June 27. 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.

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.