SEBI Penalises IL&FS Securities and Allied Financial Services for Fraudulent Transfer of Mutual Fund Units from Dalmia Cement and OCL’s Accounts
Moneylife Digital Team 05 July 2021
Capital market regulator Securities and Exchange Board of India (SEBI) has imposed a penalty on IL&FS Securities Services Ltd (ISSL) and Allied Financial Services Pvt Ltd (AFSPL) over their involvement in fraudulent transfer of mutual fund (MF) units from the client's accounts. SEBI has imposed a total penalty of Rs26 crore on IL&FS Securities Services Ltd and has also restrained IL&FS Securities from acquiring any new clients for a period of two years.
In a separate order, SEBI imposed penalties of Rs3 crore on AFSPL and another Rs3 crore on its MD, Awanish Kumar Mishra. Further, SEBI also imposed penalties of Rs14 lakh and Rs7 lakh on its directors Himanshu Arora and Jitendra Kumar Tiwari.
Additionally, SEBI said that IL&FS Securities Services Ltd would also have to undertake a comprehensive overhaul of all its procedures and policies, especially its risk management policy, and implement necessary corrective measures to ensure that the violations observed are not repeated.
However, SEBI also said that the order shall be subject to any order passed by the Supreme Court (SC), while enforcement of the liability and the order shall also be subject to the orders of the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) since the entire IL&FS group, including the noticee (ISSL), is undergoing a resolution process. 
The matter relates to February 2019, when Finsec Law Advisor on behalf of clients Dalmia Cement East Limited and OCL India Limited alleged fraudulent transfer of mutual fund units worth Rs344.07 crore by AFSPL. 
Dalmia group alleged that ILFS Securities Services Limited, a clearing member of NSE Clearing Limited, was also involved in the fraudulent transfer of MF units from the accounts of DCEL and OCL.
MF units of its two erstwhile subsidiaries were earlier 'fraudulently and illegally transferred' by Allied Financial Services Pvt Ltd (AFSPL) 'in collusion with IL&FS Securities Services Limited (ISSL)', Dalmia Bharat had said in a regulatory filing. The two subsidiaries were of Dalmia Bharat's step-down firm Dalmia Cement (Bharat) Limited (DCBL).
SEBI conducted an investigation into the matter for the period from 20 February 2017 till 8 February 08 2019 to determine violations of any provisions of the SEBI Act, 1992, SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (PFUTP Regulations), SEBI (Stockbrokers) Regulations, 1992(SB Regulations), bye-laws/regulations/rules of the NSE Clearing Limited (NCL) and relevant circulars issued by SEBI.
SEBI received the copies of the following reports related to the noticee (IL&FS Securities Services Ltd) : 1) Special review carried out by Grant Thornton to look into the dealings of the noticee with AFSPL (Grant Thornton was appointed by the noticee itself for this audit) and 2) NCL’s inspection report with respect to functioning of the noticee as a clearing member
A show-cause notice was issued on 9 December 2019 which mentioned the irregularities while on-boarding AFSPL by IL&FS Securities Services Ltd, anomalies noted in KYC (know your customer) details pertaining to existing relationship of AFSPL with IL&FS group, different chartered accountant's (CA) certificates with different financial statements and shareholding patterns were submitted by AFSPL to the ministry of corporate affairs (MCA)/ National Stock Exchange (NSE) and to the noticee. 
ISSL ignored the significant unusual increase in the asset size of AFSPL during FY 2017-18. ISSL also ignored AFSPL having multiple doubtful transactions with related parties where the recovery was doubtful. A clearing member is required to do proper due diligence when establishing relationship with new client. 
There were four instances where collateral was released by the noticee to AFSPL without corresponding reduction in exposure/margin requirements. The aforesaid instances of release of collaterals over weekends were unusual. The said release of collateral by the noticee helped AFSPL to make Dalmia group believe that their MF units were intact in the respective demat accounts.
ISSL provided enhanced intra-day limits to AFSPL without sufficient collateral inflow. ISSL permitted roll-over of position of AFSPL, despite having served it with a termination notice after its failure to pay margins. Further, ISSL did not satisfy minimum net worth criteria fo a clearing member , as on 31 March 3 2018, and incorrectly calculated its net worth, as on 30 September  2018. 
SEBI also noted that ISSL has admitted to committing serious lapses in risk management by submitting that it followed a practice under which collateral can be returned to all its empanelled trading members upon receipt of a request from the client. This shocking and cavalier approach towards an important element of risk management deserves an appropriate amount of penalty. 
 “It has also been established that the conduct of the Noticee is an unfair trade practice and that it has dealt with the MF units in a fraudulent manner. These are grave and serious findings and commensurate penalty is liable to be imposed on the Noticee,”said the order by Madhabi Puri Buch, whole-time member (WTM) of SEBI.
"I note that in view of the facilitation of fraud being a fraudulent and unfair trade practice, the noticee (IL&FS Securities Services) is liable for monetary penalty under Section 15HA of the SEBI Act," the order added.
On 3 April 2021, cement maker Dalmia Bharat said that securities worth Rs344 crore were credited back to the demat account of its arm by IL&FS Securities Services following a Supreme Court order.
Earlier on 16 March 2021, the SC had modified its previous order of August 2019 and had allowed the release of the securities. The apex court had directed "release of the Mutual fund units of two erstwhile subsidiaries of DCBL, which is a subsidiary of the company, valued at approximately Rs 344 crore which were fraudulently and illegally transferred by AFSPL in collusion with IL&FS Securities Services Limited (ISSL) and the same were lying with ISSL.”
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