IL&FS Securities Services Ltd. Vs. NSE Clearing & Ors. [SAT Order – 03.07.2019] – CorpLexia

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Jul 17, 2019
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[Highlights: First, the Hon’ble Securities Appellate Tribunal has held that decisions of Clearing Corporations established under Section 8-A of the Securities Contract (Regulation) Act, 1956 are appealable under Section 23L of that Act. Second, it reiterated that SEBI has wide powers to consider an annulment of trades under Sections 11 & 11B of the SEBI Act, 1992. Third, an affected party has the right to apply for the modification of a SEBI order and SEBI cannot deny such party, seeking to protect its interests, an opportunity of being heard.]

Decided by the Hon’ble Securities Appellate Tribunal, Mumbai – Appeal No. 262/2019 – Decided on 03.07.2019 (here)

Facts of the Case

In 2018, Allied Financial Services Private Limited (a stockbroker) had sold certain NIFTY options contract on the F&O Segment of the National Stock Exchange of India which were to expire on 27th June 2019 on the basis of mutual fund units that were placed as collateral by it with IL&FS Securities Services Limited (“ISSL”), a clearing corporation. These mutual fund units had been fraudulently transferred by Allied from the demat accounts of certain clients. The appeals before the Tribunal in this matter were divided as such:

1. IL&FS Securities Services Ltd. (“ISSL”) had challenged the order of NSE Clearing Limited (“NCL”) where NCL had refused to annul the impugned fraudulent trades by Allied, the financial pinch of which was being suffered by ISSL.

2. Navjoy Emporium Pvt. Ltd., Dalmia Cement (Bharat) Limited and 44 individual investors, who were victims of the fraud perpetrated by Allied, had challenged SEBI’s refusal to grant them a hearing in the matter before passing orders, despite the fact that they were vitally affected by the said order; and

3. Citi Bank, one of the counterparties to the impugned options contracts, had also sought representation in the matter to oppose the annulment of the impugned trades.

Decision of the Court

1. ISSL’s Case: It was held in this case that decisions of NCL, as a clearing corporation, are appealable under Section 23L of the Securities Contract (Regulation) Act, 1956 (“SCRA”) pursuant to the interpretation of Section 23L R/w Sections 4 and 8-A of the SCRA. NCL had previously been ordered to hear ISSL’s application for annulment of trades and pass a necessary order after which NCL heard the parties and refused to decide the question of annulment on merit, pursuant to Clause 5 of Chapter VII of its bye-laws, stating that it could not pass orders for the annulment of trades by essentially initiating proceedings parallel to SEBI’s and EOW’s investigations. Therefore, the Tribunal concluded that SEBI must decide whether the impugned trades by Allied were fraudulent or not by providing ISSL appropriate opportunity of being heard.

2. Navjoy/Dalmia and the Individual Investors’ Cases: The Tribunal re-iterated that SEBI, under Section 11 & 11B of the SEBI Act, 1992, is competent to consider a complaint with regard to an annulment of trades (IL&FS Securities Services Ltd. vs. SEBI & Ors.). Furthermore, where a person is affected either directly or indirectly, the said person would have a right to apply for modification of the order and if such a person applies for being heard for protection of its interest, SEBI could not deny the opportunity of being heard. Therefore, SEBI was ordered to grant these aggrieved parties a hearing for any appropriate remedies.

3. Citi Banks’ Case: The Tribunal directed SEBI to give an opportunity for a hearing to Citi Bank, as a counter party to Allied’s impugned options contracts in order to balance the interests of the aggrieved parties on either side of the impugned options contracts.


The Tribunal has directed SEBI to hear the grievances of the abovementioned parties and pass a reasoned order therefrom by 17th of July 2019. Finally, the SAT has directed that the impugned Nifty option contracts on the F&O Segment of the NSE which was to expire on 27th June 2019 would remain in abeyance till 22nd July 2019.

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