2021 (3) TMI 1280 - SC - Indian Laws

Seeking to release/transfer Mutual Fund units in favour of Respondent No.5Applicant herein, by crediting the same in their demat account maintained by NSDL - HELD THAT - Substantial doubts have been raised by both the Applicant and ISSL regarding each other s involvement/collusion with Allied in perpetrating the alleged fraud and in fact, the very nature and substance of the alleged fraudulent activities itself. These questions/allegations are subject matter of the Accompanying Appeal and the investigations being carried out by SEBI and EOW. Until the final disposal of the Accompanying Appeal, it is imperative that the interests of all the parties are substantially protected, including that of the Applicant. It is not disputed that the ownership of the Mutual Fund units vests with the Respondent No. 5Applicant herein - We agree with Respondent No. 1 to the extent that mere filing of a chargesheet would not constitute a material change in circumstances showing mala fide on part of ISSL. The same is not conclusive proof of guilt. Indeed, we find it imperative to note that we do not wish to express any opinion on the merits of the allegations made by the parties against each other at this stage. There are some merit in the Applicant s contention that if they are compelled to encash the Mutual Fund units at this juncture, they would be deprived of increase in value of the securities. The Courts must adopt a pragmatic approach in such matters which touch upon high value commercial assets. At the same time, if it is subsequently proved that the Applicant was indeed hands in glove with Respondent No. 4 Allied, the other parties should not be left remediless. Hence, looking to the facts and circumstances, we find that the ends of justice would be served if the Mutual Fund units are released to the Respondent No. 5Applicant subject to provision of appropriate guarantee. The interim order is modified to the extent that the Mutual Fund units of Respondent No. 5-Applicant, kept with the Respondent No.1- ISSL, be released in favour of the Respondent No.5- Applicant by way of transfer of the said Mutual Fund units and crediting the same in the demat account of the Respondent No.5-Applicant. This is subject to the Applicant furnishing requisite Bank Guarantee of equivalent value as the Mutual Fund units, to the satisfaction of the Trial Court - application disposed off.

Summary

Issues Involved:
1. Ownership and fraudulent transfer of Mutual Fund units.
2. Interim Order modification request.
3. Allegations of fraud and collusion.
4. Protection of parties' interests and financial implications.

Issue-wise Detailed Analysis:

1. Ownership and Fraudulent Transfer of Mutual Fund Units:
The Respondent No. 5 (Applicant) argued that Mutual Fund units worth INR 344.07 crores, belonging to them, were fraudulently transferred by Allied Financial Services Private Limited (Allied) without authorization. These units were held in demat accounts of OCL India Limited (OCL) and Dalmia Cement East Limited (DCEL), which had merged with the Applicant. The Applicant asserted that no power of attorney or authorization was given to Allied to deal with these units. They alleged that Allied placed these units as collateral for its own transactions, leading to a complaint with SEBI and the Economic Offences Wing (EOW). The EOW's chargesheet and SEBI's show cause notice indicated collusion between Allied and IL & FS Securities Services Ltd. (ISSL) in the fraudulent transfer.

2. Interim Order Modification Request:
The Applicant sought modification of the Interim Order dated 27.08.2019, requesting the transfer of the Mutual Fund units to their demat account. They argued that as the rightful owner, they should not be deprived of the units' appreciation in value. The Interim Order had initially provided for the encashment of these units, but the Applicant preferred to retain them due to potential financial loss from premature encashment.

3. Allegations of Fraud and Collusion:
The Applicant's main contention was that ISSL was a key conspirator in the fraud, as evidenced by the EOW's chargesheet. They argued that ISSL should not retain possession of the stolen units. Conversely, ISSL and other Respondents contended that the Interim Order protected all parties' interests and that mere filing of a chargesheet did not warrant modification. They also alleged that the Applicant might have been complicit in the fraud, citing an arrangement between the Applicant and Allied.

4. Protection of Parties' Interests and Financial Implications:
The Court recognized the need to protect the interests of all parties until the final disposal of the accompanying appeal. It acknowledged that the ownership of the Mutual Fund units vested with the Applicant and that the units' value was likely to appreciate. The Court also noted that the pandemic had delayed the resolution of the case, making it pragmatic to allow the Applicant to retain the units while providing a Bank Guarantee of equivalent value. This approach balanced the Applicant's financial interests with the need to ensure remedies for other parties if the Applicant's complicity was proven.

Court's Analysis and Conclusion:
The Court concluded that substantial doubts existed regarding the involvement of both the Applicant and ISSL in the alleged fraud. It emphasized that the chargesheet alone did not constitute conclusive proof of guilt. The Court decided to modify the Interim Order, allowing the transfer of the Mutual Fund units to the Applicant's demat account, subject to the provision of a Bank Guarantee of equivalent value. This decision aimed to protect the Applicant's financial interests while preserving the rights of other parties pending the final outcome of the appeal.

Order:
The Court ordered the release of the Mutual Fund units to the Applicant, subject to furnishing a Bank Guarantee of equivalent value, to the satisfaction of the Trial Court. The Trial Court was directed to dispose of the application for release expeditiously. The Interim Order dated 27.08.2019 would continue to operate for other parties/non-applicants. The observations made were specific to the disposal of the present application and did not affect the merits of the main appeals.