Allied Financial Options Dispute: Supreme Court Asks NCL To Honour F&O Contracts
Top court vacates interim order in the Allied Financial options dispute case.
The Supreme Court has asked the NSE Clearing Ltd. to honour the futures and options trade contracts in the Allied Financial Services Pvt. Ltd.’s options settlement case. The cash collateral was extended by clearing broker IL&FS Securities Services towards the F&O trade.
The top court, however, clarified “that the payments would be without prejudice to the rights and contentions of all the parties and subject to the final outcome and directions that this court would pass”.
The dispute stems from the options contracts sold by Allied Financial Services through IL&FS Securities Services by illegally using mutual funds of the Dalmia Group as collateral. IL&FS Securities Services, liable for payouts, moved the Supreme Court to nullify the option. The top court on June 26 stayed settlement of the payment obligations under further orders.
The top court bench of Justice Mohan Shantanagoudar and Justice Sanjeev Khanna also gave option to Novjoy Emporium Pvt. Ltd., OCL India Ltd., Dalmia Bharat Group and 44 other parties to “ask for conversion/sale/encashment of the mutual funds which were purportedly furnished as a security by Allied Financial Services”.
‘’On the option being exercised, IL&FS Securities Services Ltd. shall convert/encash the mutual funds, and the amount realised would be deposited in a fixed deposit in a nationalised bank for a period of six months to earn maximum interest. The deposit would be in the name of IL&FS Securities Services Ltd. and abide by further orders/directions of this court,” the judgment said.
In December last year, Allied Financial Services sold long-dated Nifty 5000 call options expiring on June 27 on the NSE. Citi Mauritius, Morgan Stanley, Premji Invest and BNP Paribas bought the contracts. The trade was guaranteed by NSE Clearing Ltd.
Why IL&FS Securities Was Not Paying
IL&FS Securities deposited initial margin with the exchange. As the Nifty 5000 June call option contracts were making a loss, IL&FS topped up the margin after Allied Financial Services showed mutual funds as collateral. The contracts, however, got stuck after it came to light that the units were illegally used by the broker. To release the margin deposited with the exchange, IL&FS Securities will have to first cough up more money to settle the trades. And it won’t be able to recover it from Allied Financial Services.
Why The Settlement Process Is Under Question
As the apex court stayed the settlement and now made all payments subject to final decision, the NSE has maintained that it can’t classify the trade as a default and use the margin available with the exchange to settle the contracts. But NSE Clearing cannot decline to settle a trade as a qualified central counterparty. And not honouring a settlement could cause global institutions to lose trust.