IL&FS arm gets SC reprieve after guaranteeing a highly murky trade

The Supreme Court on June 26 granted a moratorium to IL&FS Securities (ISSL) on the Rs 460 crore it owes the NSE Clearing, till the matter is heard in an appropriate forum.

ISSL owes the money to NSE Clearing because of purported rogue trades done by one of its broker clients, Allied Financial Services. ISSL is a clearing member of the National Stock Exchange. A clearing member’s responsibility is to clear and settle trades done by brokers who are its clients.

The clearing member settles the broker’s fund payment obligations to the clearing house for the trades done and later collects the funds from the broker.

Allied Financial Services, it is alleged, misused the collateral of its client Dalmia Cement, by pledging it with ISSL and then carrying out high-risk trades not authorised by Dalmia Cement.

The collateral, comprising mutual fund units, was worth around Rs 340 crore. Allied Financial’s bets--which included futures and options trades--backfired badly, resulting in huge losses.

Being the clearing member of Allied Financial, ISSL is obligated to settle the outstanding losses worth Rs 460 crore to NSE Clearing.

ISSL’s position is that both itself and the broker are in no position to honour the trades and that NSE should annul the trade and incur the loss out of its investor protection fund, as it has the power to do so.

NSE Clearing has declined ISSL’s request. ISSL’s own net worth, at Rs 120 crore, is about one-fourth of the amount sought. Its parent company IL&FS is anyway reeling under a massive scam.

The Supreme Court has directed ISSL to immediately file an appeal against NSE Clearing’s order in a competent court.

On its part, Allied Financial has refuted Dalmia’s charge that it misused the collateral for its trades, saying it has evidence of having paid interest for using the capital.

SEBI has rejected this claim and ordered a forensic audit of Allied Financial.

IL&FS spokesperson Sharad Goel declined to comment on this development.

The SC ruling could have an impact on other financial market participants, as some of the contracts undertaken by Allied are due to expire on June 27. Failure by ISSL to come through on the payments could impact the positions of as many as 50 brokers who maintain positions with ISSL, sources told Moneycontrol.

Note: This article has been updated with SEBI's observation.