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SAT Sends Allied Financial Services Options Dispute Back To SEBI

SAT directed SEBI to hear the parties on July 10 and pass orders before July 17.

SAT also rejected SEBI’s objections to IL&FS Securities Services Ltd.’s demand seeking the contracts to be annulled. (Photo: BloombergQuint)
SAT also rejected SEBI’s objections to IL&FS Securities Services Ltd.’s demand seeking the contracts to be annulled. (Photo: BloombergQuint)

The dispute over the settlement of options contracts issued by stockbroker Allied Financial Services Pvt. Ltd. based on illegally used collateral is back with the market regulator.

All parties should approach the Securities and Exchange Board of India with relevant details, the Securities Appellate Tribunal said in an oral order. The contracts can’t be settled till July 22 in accordance with the Supreme Court order, it said.

SAT also rejected SEBI’s objections to IL&FS Securities Services Ltd.’s demand seeking the contracts to be annulled. IL&FS Securities Services is a counterparty to the call options.

The tribunal directed SEBI to hear the parties on July 10 and pass orders before July 17.

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 a collateral. IL&FS, liable for payouts, moved the Supreme Court to nullify the option. The top court on June 26 stayed settlement and asked the tribunal to decide.

What Happened?

In December, 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 Is 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 a 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, 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, or the clearing corporation, cannot decline to settle a trade as a qualified central counterparty. And not honouring a settlement could cause global institutions to lose trust.