Sebi has imposed penalties totalling more than Rs 32 crore on IL&FS Securities Services Ltd (ISSL), Allied Financial Services Pvt Ltd (AFSPL) and three individuals for lapses in connection with alleged fraudulent transfer of mutual fund units of three companies. Besides, the watchdog has passed various directions against them.
The regulator has passed two separate orders, dated July 2, against ISSL, and AFSPL and its three directors after it carried out a detailed investigation into the matter for the period from February 20, 2017 till February 8, 2019. ISSL is a clearing member while AFSPL is a depository participant.
While imposing a fine of Rs 26 crore on ISSL, a clearing member, and also passing certain directions, Sebi noted that its order would be subject to any order passed by the Supreme Court. Also, enforcement of the liability and the order would be subject to the orders of the National Company Law Tribunal and the National Company Law Appellate Tribunal (NCLAT).
These directions come against the backdrop of the entire IL&FS Group, including ISSL, undergoing a resolution process. In January 2021, Sebi held that it has the jurisdiction to determine the monetary and non-monetary liabilities of ISSL in case there are violations and the order was also upheld by the Securities Appellate Tribunal (SAT) while ISSL’s appeal is pending before the Supreme Court. In the 68-page order, Sebi noted that ISSL being a clearing member 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 (ISSL) is an unfair trade practice and that it has dealt with the mutual fund units in a fraudulent manner," it said. Apart from the fine of Rs 26 crore, Sebi has barred ISSL from acquiring any new clients for two years, subject to certain conditions.
“The noticee shall undertake a comprehensive overhaul of all its procedures and policies, especially its Risk Management Policy. The noticee shall implement necessary corrective measures to ensure that the violations observed are not repeated," the watchdog said. In the case of AFSPL, Sebi has imposed a fine of Rs 3 crore on it. A penalty of Rs 3 crore has also been slapped on Awanish Kumar Mishra its Managing Director, and two directors — Himanshu Arora (Rs 14 lakh) and Jitendra Tiwari (Rs 7 lakh), as per a Sebi’s 84-page order.
The regulator has also barred AFSPL and Mishra from the accessing the securities market for seven years. Besides, Mishra has been restrained from associating with a listed entity, a material subsidiary of a listed entity or a Sebi-registered intermediary in any capacity, for seven years. Arora and Tiwari have been barred from the securities market for three years and one year, respectively.
The period of ban would be effective from the date of the order. In the order, Sebi noted that a depository participant acts as an interface between the depositories and the investors. “It is this very aspect of safety that AFSPL has undermined with its conduct, which has been found to be fraudulent, deceptive and an unfair trade practice".
According to the regulator, AFSPL has undermined the good faith, ethical standards and integrity that it was expected to show, as a registered intermediary, when dealing with its clients. Sebi had initiated a probe into the case following various complaints.
A complaint was filed in February 2019 by two Dalmia Group companies — Dalmia Cement East Ltd and OCL India — alleging fraudulent transfer of mutual fund units worth Rs 344.07 crore by AFSL. Another set of complaints, made in December 2018 and January 2019 by Novjoy Emporium Pvt Ltd (NEPL) alleged unauthorised transfer of mutual funds worth Rs 21 crore by AFSL.