Supreme Court adjusts Dalmia's security requirements amidst SEBI fraud findings

The Supreme Court modified the order dated 16.03.2021, reducing Dalmia's bank guarantee requirement from Rs. 344.07 crores to Rs. 100 crores and allowing the remaining Rs. 300 crores to be secured by an unencumbered asset. The Court considered SEBI's findings of fraud against AFSPL and adjusted the security requirements accordingly. The bank guarantee already provided would be discharged upon meeting the new conditions. The Court specified that these changes would not impact the case's merits in the appeals, and also disposed of ISSL's interlocutory application in line with this order.

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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 Rs. 344.07 crores, including annual expenses of Rs. 3.05 crores and blocked funds of Rs. 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 Rs. 100 crores and allowing the remaining Rs. 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 Rs. 344.07 crores to Rs. 100 crores and allowing the remaining Rs. 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.

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