SUPREME COURT DECIDES UPON THE ISSUE OF MODIFICATION OF ORDER AGAINST IL&FS SECURITIES SERVICES LTD.

A Two Judge Bench of the Supreme Court comprising of Justice Vineet Saran and Justice J.K. Maheshwari passed a Judgment dated 11.04.2022 in SEBI vs IL&FS Services Ltd and ORS, C.A. No.-005395-005398/2019 and decided upon the issue whether the operative part of its earlier Order dated 21.09.2021 deserves to be modified in a dispute pertaining to release of mutual funds in favor of the Respondent.

Facts of the Case:

1. The dispute was regard to the release of the mutual funds in favour of the Dalmia Cement (Bharat) Ltd (Applicant/Respondent No.5), which valued at about Rs. 350 Crores.
2. The Apex Court had earlier passed an Interim Order dated 08.2019 in this case and had given the option to Applicant/Respondent No.5 to get mutual funds encashed and the amount was to be deposited in a fixed deposit account of a nationalized bank. The said Interim Order was modified by the Supreme Court by a detailed Order dated 16.03.2021 passed in I.A. No.100812/2020 in C.A. Nos.53955398 of 2019 to the extent that mutual fund units kept with IL&FS Securities Services Limited (ISSL), the Respondent No. 1, have to be released in favor of Respondent No. 5 by way of crediting the same in a demat account of the Respondent No. 5. Provided that the Respondent No. 5 would furnish a bank guarantee of a value equivalent to the mutual fund units, to the satisfaction of the Trial Court.
3. Another Application bearing A. No.84110/2021 was filed by the Applicant/Respondent No. 5 and the Apex Court further modified its earlier Order dated 16.03.2021 on 21.09.2021 to the extent that instead of a bank guarantee worth Rs. 344.07 Crore furnished by Respondent No. 5, the Respondent No. 5 has to now furnish a bank guarantee of Rs. 100 Crores and furnish a security of Rs. 300 Crores of an unencumbered asset, the value of which is duly certified by a chartered accountant cum valuer. Further, the bank guarantee already furnished shall stand discharged.
4. Thereafter, the Application bearing A. No.6482 of 2022 has been filed by the Applicant/Respondent No.5 for a further modification of the Order dated 21.09.2021 before the Supreme Court and also sought return / release of the original Bank Guarantee of Rs. 344.07 Crores furnished by the Respondent No. 5.
5. A supplementary charge sheet has been filed by the Economic Offences Wing (“EOW”), in which a clear finding recorded against ISSL i.e. Respondent No.1 and Allied Financial Services Pvt. Ltd i.e. Respondent No.4 to the extent that it has been found that “after settlement of above trades by ISSL out of the funds of Allied, the securities fraudulently pledged by Allied became free from collateral and ought to have been rightfully returned to its original/rightful owner i.e. Complainant (Dalmia) and ISSL cannot have any claim of any nature over the said securities”
6. The Serious Fraud Investigation Office (‘SFIO’) reported the buying and selling of illiquid contracts was a preplanned synchronized activity wherein the exchange platform was used to camouflage a financial transaction. As such, the SFIO has also recorded a clear finding that the ISSL has fraudulently allowed movement of collaterals. It has been submitted that although the matter is still under investigation but prima facie view of EOW and SFIO are both clearly against the ISSL/Respondent No.1 and Allied Financial Services Pvt. Ltd./Respondent No.4.
7. Senior Counsel appearing for the Respondent No.1 have opposed the prayer for any further modification of the Order dated 21.09.2021. They have submitted that the conditions imposed in the Order dated 21.09.2021 are fully justified. It is contended by them that though the EOW has on 09.11.2021 filed a Supplementary Charge Sheet against Respondents No.1 and 4 but the fulcrum of this Charge Sheet is the order of the SEBI dated 02.07.2021, which was passed prior to 21.09.2021. It is contended that though observations have been made in the SFIO report, the same are not final as the matter is still under investigation.

Therefore, the Apex Court held, “the subsequent supplementary charge sheet submitted by the EOW, and relied upon by the learned counsel for the petitioner, ought not to be ignored while considering this matter. In its earlier orders, this Court has clearly found that the securities need to be released in favour of the applicant/Respondent No.5. The only question is with regard to the mode and manner of the securities to be furnished by the applicant/Respondent No.5. It is not disputed that the petitioner has, in terms of the order dated 16.03.2021, complied with the condition of furnishing bank guarantee of Rs.344.07 Crores.

In paragraph 20 of this application filed by the applicant/Respondent No.5, it is stated that the applicant is a public limited company, having sound financials with a strong Balance Sheet and other financial statements (assets of INR 18,556 Crores and turnover of INR 8,779 Crores during financial year 202021). The same is not denied by the other parties who have filed their respective replies to this application.”

Based on the aforesaid ground, the Supreme Court held that the Order dated 21.09.2021 deserves to be modified to the extent that instead of a bank guarantee worth Rs. 344.07 Crore furnished by Respondent No. 5, the Respondent No. 5 has to now furnish a bank guarantee of Rs. 100 Crores and furnish a corporate guarantee of Rs. 300 Crores. Further, the bank guarantee already furnished shall stand discharged, subject to satisfaction of the Trial Court.

Shruti Srivastava

Associate

The Indian Lawyer