2021 (9) TMI 1376 - SC - SEBI

Fraud under SEBI Act - penalty imposed - as contended that the applicant/Dalmia has suffered because of the fraud committed by respondent no.1/IL FS Securities Services Ltd as well as respondent no.4/Allied Services Pvt. Ltd. - HELD THAT - Keeping in view the findings recorded by the SEBI about the degree of involvement of the applicant/Dalmia in the said transactions, as revealed in records before us, as well as the involvement of respondent no.4 and tentative findings of fraud by respondent no.4, and also keeping in view that by a separate order penalty has also been imposed on respondents no.1 and 4 by the SEBI (without there being any finding of fraud against respondent no.1), we modify the order dated 16.03.2021 to the following extent That instead of bank guarantee for a sum of ₹ 344.07 crore, which has been furnished by applicant/Dalmia in terms of our order dated 16.03.2021, the applicant/Dalmia shall now furnish a bank guarantee for a sum of ₹ 100 crores and further it shall furnish a security to the extent of ₹ 300 crores of an unencumbered asset, the value of which may be duly certified by the Chartered Accountant-cum-Valuer, who have no conflict of interest having regard to the parties involved and interest in the subject matter and may be any one of the following. 1. PricewaterhouseCoopers Private Limited 2. Ernst and Young 3. KPMG The bank guarantee already furnished by the applicant/Dalmia to the extent of ₹ 344.07 crores shall stand discharged on the applicant/Dalmia fulfilling the above conditions to the satisfaction of the Trial Court. The applicant/Dalmia shall also file an affidavit before this Court to the extent that the asset, which is being furnished as security, is an unencumbered property. It is clarified that any observations made in this order will not affect the merits of the case, when the appeals are heard on merits.

Summary

Issues Involved:
1. Modification of the order dated 16.03.2021.
2. Ownership and release of mutual funds.
3. Furnishing of bank guarantee and associated expenses.
4. Allegations of fraud and involvement of parties.
5. SEBI’s orders and findings dated 02.07.2021.

Detailed Analysis:

1. Modification of the Order Dated 16.03.2021:
The appellant, Dalmia Cements (Bharat) group, sought modification of the Supreme Court's order dated 16.03.2021, which had earlier modified an order from 27.08.2019. The relevant part of the 27.08.2019 order involved the conversion/encashment of mutual funds by IL & FS Securities Services Limited (ISSL) and depositing the realized amount in a fixed deposit. The 16.03.2021 order modified this to allow the release of mutual fund units to Dalmia upon furnishing a bank guarantee of equivalent value.

2. Ownership and Release of Mutual Funds:
Dalmia argued that the ownership of the mutual funds was undisputedly theirs, as affirmed by SEBI’s orders dated 02.07.2021. They contended that the bank guarantee requirement should be waived due to the clear ownership and the significant expenses incurred for maintaining the guarantee. The Court acknowledged the ownership but required Dalmia to furnish a bank guarantee and security for the mutual funds' release.

3. Furnishing of Bank Guarantee and Associated Expenses:
Dalmia highlighted the financial burden of maintaining a bank guarantee worth ?344.07 crores, including annual expenses of ?3.05 crores and blocked funds of ?103.22 crores. They proposed replacing the bank guarantee with a corporate guarantee due to their substantial financial worth. The Court modified the requirement, reducing the bank guarantee to ?100 crores and allowing the remaining ?300 crores to be secured by an unencumbered asset, certified by a Chartered Accountant-cum-Valuer from a specified list.

4. Allegations of Fraud and Involvement of Parties:
Dalmia claimed they suffered due to fraud by ISSL and Allied Financial Services Pvt. Ltd. (AFSPL), as confirmed by SEBI’s findings. ISSL and AFSPL opposed the modification, arguing that Dalmia was part of the fraud. The Court considered the degree of involvement and the findings of fraud against AFSPL, leading to the modified security requirements.

5. SEBI’s Orders and Findings Dated 02.07.2021:
SEBI’s detailed orders on 02.07.2021 found AFSPL guilty of fraudulent activities, including misrepresentation and concealment of mutual fund units' status. SEBI imposed penalties and market restrictions on AFSPL and associated individuals. The Court took these findings into account while modifying the security requirements for Dalmia.

Conclusion:
The Supreme Court modified the order dated 16.03.2021, reducing the bank guarantee requirement for Dalmia from ?344.07 crores to ?100 crores and allowing the remaining ?300 crores to be secured by an unencumbered asset. The bank guarantee already furnished would be discharged upon fulfilling the new conditions. The Court clarified that these observations would not affect the merits of the case during the appeals. The interlocutory application by ISSL was also disposed of in terms of this order.