Allied Financial Case: Citigroup Moves Against Annulment Of Call Options

Citigroup moved the Securities Appellate Tribunal against annulment of derivative contracts struck by Allied Financial Services Pvt. Ltd. by illegally using mutual funds as a collateral.

The plea came against the IL&FS Securities Services Ltd.'s demand to annul the contracts citing that the settlement of trades was entered on the basis of fraudulently transferred collateral.

Janak Dwarkadas, representing Citigroup, however, argued that these were legally valid options contracts and Securities and Exchange Board of India or the tribunal are not empowered annul them.

The dispute stems from complaints to the market regulator by Novjoy Emporium Private Ltd., Dalmia Bharat Ltd. and OCL India Ltd. that Allied Financial fraudulently transferred mutual fund securities worth more than Rs 360 crore into its account to show them as a collateral for trading in the F&O market. SEBI's May 17 order found the stock-broker and depository participant guilty, barring it from securities market.

IL&FS Securities Services Ltd. approached SEBI to annul the options contract to be settled on March 27 and June 28 and also sought modification in the order that froze securities owned by Allied Financial.

SEBI rejected the appeal, and IL&FS Securities approached the SAT for relief. On May 15, the tribunal directed SEBI to hear the company. Separately, the IL&FS unit moved the Supreme Court to seek a temporary stay on the settlements of the trades and its payment obligations, which the top court granted on June 26.

SEBI, however, today argued that it acted to protect investors and markets. The tribunal questioned the maintainability of these arguments on the ground that the regulator had frozen the assets of Allied Financial affecting IL&FS Securities, which is an active market participant.

But in the tribunal, Citigroup argued:

• Citigroup purchased call options worth Rs 197 crore in December which were set to expire on June 27.
• Citi was informed by the clearing corporation that the transaction could not be completed on account of SEBI order freezing of securities.
• Citi cannot be made to suffer on account of the underlying problems between the clearing corporation and its members.
• The tribunal is being asked to pass an order to unravel a fraud. Such powers rest with civil and criminal courts.

The tribunal will pass its order on July 3.