Fund crunch at IL&FS Securities Services Ltd (ISSL) hit its client-brokers on Thursday morning as the National Stock Exchange (NSE) put their terminals in square-off mode due shortfall in settlement payments by ISSL. On Friday too, the terminals continued to remain in square-off mode. However, there is no panic among brokers like yesterday, says a market participant.
IL&FS Securities is facing financial problems due to about Rs380-crore derivative fraud by Allied Financials Services Pvt Ltd, a depository participant (DP), which is also a brokerage firm. While fund shortage with the IL&FS group company is known to everyone, in the fraud case, Securities and Exchange Board of India (SEBI), needs to come forward and resolve the issue on its own, instead of going to courts, says a brokerage firm who knows the matter. But more about it later.
According to this broker, who does not want to be named, on Thursday about 150 brokers, who had signed clearing agreements with ISSL were not allowed to put in fresh orders for nearly two hours and their trading terminals were put in square-off mode only.
He says, “Thursday being the last day for settlements of futures & options (F&O) segment, the situation was chaotic. Today (Friday) these terminal continue to be in square-off mode.”
On Thursday, these terminals were restored two hours after ISSL paid the dues, says a report. "...about 150 brokers who had signed clearing agreements with ISSL were not allowed to put in fresh orders for nearly two hours and their trading terminal was re-activated by noon only after ISSL made the payments," a report from Economic Times says
Quoting experts, a report from the Hindu Business Line says
, "the situation at IL&FS Securities is precarious as brokers and clients are seeking a return of their deposits given as collateral and NSE Clearing Corporation (NCC) is routinely pressing the clearing member to make good payment obligations on existing positions."
The cement maker has separately informed stock exchanges about the loss of shares, which in its case alone amounts to Rs344 crore and it had also filed a criminal complaint. SEBI also received a complaint from Novjoy Emporium Pvt Ltd alleging unauthorised transfer of its mutual fund units worth Rs21.70 crore by Allied Financial Services.
Dalmia Bharat had filed case against Allied Financials contending that it did not authorise the trades and ISSL being a clearing members should bear the loss. "ISSL maintains that it is in no financial position to honour the trades and has requested NSE Clearing, the clearing corporation of the NSE, to annul the trade and absorb the loss, as it has the power to do so under law. NSE Clearing has refused to do so," says a report from Moneycontrol.com.
The options bought by Allied Financials expired on 27 June 2019. However, since the collateral used by the broker was obtained fraudulently, the economic offences wing (EOW) of Mumbai police have frozen it. This allegedly led to defaults by Allied Financials and the IL&FS group company, which already is in financial troubles.
In February this year, SEBI had ordered forensic audit of 11 entities including Allied Financials. NSE conducted the audit of Allied Financial, which found the broker had used mutual fund units as collateral for futures & options with ISSL.
SEBI, however, changed its stance later and claimed that is had no jurisdiction over the trade annulments and NCL, being a clearing house should take a decision on this.
Earlier this month, the market regulator even moved to the Supreme Court against SAT’s order claiming that it should not be asked to investigate the Rs460-crore IL&FS Securities case as it is beyond its jurisdiction to annul trades.
It further said that the NSE Clearing Corp should be rather asked to look into the matter. Last month, the apex court had halted Rs435 crore payment by IL&FS subsidiary until Securities Appellate Tribunal (SAT) and Bombay High Court passed an order in the alleged fraudulent claims.
The SAT had earlier this month directed SEBI to pass an order in the case of Allied Financial Services, which allegedly had fraudulently used mutual fund units it did not own as margins for derivative trades. Allied Financial Services carried out alleged fraud trades on behalf of its client Dalmia Bharat resulting in a loss of about Rs460 crore.
“There are wide ramification of his case,” the broker we spoke to, says, adding, “Default of one member cannot be passed on to the others and the Exchange has to declare the member as defaulter. However, in this case, everyone, including the Exchange and the market regulator, are protecting their own turf and passing on the responsibility. I feel, SEBI should step forward and resolve the issue.”
“In addition, the transfer of mutual fund units (from Dalmia Cement to units of Allied Financial) took place a few months back. For every change in the demat account the clients receives an alert via SMS as well as periodic statement. Now after a gap of three-four months, I feel, Dalmia Cement cannot take a stand of ignorance and file claims of losses,” the market participant says.
As per NSE's February 2019 forensic report, three clients, Money Mishra Financial Services, Awanish Kumar Mishra and Money Mishra Overseas Pvt Ltd, collectively hold 89% of holdings in registrar of securities (ROS). Their holding allegedly includes mutual funds units, transferred in an unauthorised manner from third party and clients. Awanish Kumar Mishra along with Jitender Kumar Tiwari are directors of Money Mishra Financial, Money Mishra Overseas as well as Allied Financial Services.
"The member has transferred the mutual funds units belonging to unregistered entities or client to its client beneficiary account through its three associated concerns viz. Money Mishra Financial Services, Awanish Kumar Mishra and Money Mishra Overseas Pvt Ltd. It is further observed that these transferred mutual fund units have been used as collateral for futures & options (F&O) margin with its clearing member ISSL towards trade obligations of these three associated concerns," the NSE report says.
The report also find out non-availability of funds payable to clients in the bank accounts of Allied Financial Services. As on 31 January 2019, the broker was supposed to pay Rs138.78 crore to clients. However, total funds available with it, including deposits of Rs42.42 crore with ISSL, amount of Rs1.1 crore with exchanges, and bank balance of Rs84 lakh, were only Rs44.36 crore. There was a shortfall of Rs94.42 crore.
Besides Allied Financial Services, SEBI had banned Rajeev Kumar Asopa, Lalit Agarwal, Rajendra Prasad Basia, Awanish Kumar Mishra, Jitendra Kumar Tiwari, Money Mishra Financial Services, Money Mishra Overseas Pvt Ltd, Pankaj Garg and Jitender Malhotra from accessing the securities market.