LEGAL ISSUE: Modification of conditions for release of mutual funds. CASE TYPE: Civil Appellate Jurisdiction. Case Name: Securities and Exchange Board of India vs. IL&FS Securities Services Ltd. and Ors. Judgment Date: 11 April 2022
Introduction
Date of the Judgment: 11 April 2022
Citation: Not Available
Judges: Vineet Saran, J. and J.K. Maheshwari, J.
Can a public limited company with a strong financial record be granted relief from stringent security conditions when seeking the release of its own mutual funds? The Supreme Court addressed this question while modifying its previous order concerning the release of mutual funds belonging to Dalmia Cement (Bharat) Ltd. The court considered a supplementary charge sheet filed by the Economic Offences Wing (EOW) and the financial standing of the applicant while modifying the conditions for release of the mutual funds. The bench comprised of Justices Vineet Saran and J.K. Maheshwari.
Case Background
The dispute revolves around the release of mutual funds worth approximately ₹350 crores belonging to Dalmia Cement (Bharat) Ltd. (Respondent No. 5). Initially, the Supreme Court allowed the conversion/encashment of these funds, with the proceeds to be deposited in a fixed deposit account. This order was later modified to allow the transfer of mutual fund units to Dalmia Cement’s demat account, provided they furnished a bank guarantee of equivalent value. Subsequently, the court further modified the order, reducing the bank guarantee amount to ₹100 crores and requiring a security of ₹300 crores of unencumbered assets. Dalmia Cement sought another modification to release the original bank guarantee of ₹344.07 crores.
Timeline
| Date | Event |
|---|---|
| 27.08.2019 | Supreme Court allows Dalmia Cement to convert/encash mutual funds and deposit the amount in a fixed deposit account. |
| 16.03.2021 | Supreme Court modifies the order, allowing the transfer of mutual fund units to Dalmia Cement’s demat account upon furnishing a bank guarantee of equivalent value. |
| 23.03.2021 | Dalmia Cement furnishes a bank guarantee of INR 344.07 Crores. |
| 21.09.2021 | Supreme Court further modifies the order, reducing the bank guarantee to ₹100 crores and requiring a security of ₹300 crores of unencumbered assets. |
| 09.11.2021 | Economic Offences Wing (EOW) files a supplementary chargesheet against Respondents No. 1 and 4. |
| 11.04.2022 | Supreme Court modifies the order, replacing the ₹300 crore unencumbered asset security with a corporate guarantee of the same amount. |
Arguments
Applicant/Respondent No. 5 (Dalmia Cement):
- Dalmia Cement argued that a supplementary chargesheet by the EOW and a report by the Serious Fraud Investigation Office (SFIO) indicated that IL&FS Securities Services Ltd. (ISSL/Respondent No. 1) and Allied Financial Services Pvt. Ltd. (Respondent No. 4) were involved in fraudulent activities.
- Dalmia Cement contended that the mutual funds rightfully belonged to them, and they should be given custody without stringent conditions.
- Dalmia Cement highlighted its sound financial position as a public limited company, with substantial assets and turnover, and argued that the requirement to furnish a bank guarantee and security was inequitable.
- Dalmia Cement sought the return of the original bank guarantee of ₹344.07 crores.
Respondent No. 1 (IL&FS Securities Services Ltd.):
- ISSL opposed any further modification of the order dated 21.09.2021, arguing that the conditions imposed were justified.
- ISSL contended that the EOW chargesheet was based on a SEBI order that predated the 21.09.2021 order.
- ISSL submitted that the SFIO report was not final as the matter was still under investigation.
Other Respondents (SEBI, Respondent No. 4/Allied, Retail Investors):
- SEBI, Allied Financial Services Pvt. Ltd., and retail investors also opposed any further modification of the order dated 21.09.2021.
Submissions Table
| Main Submission | Sub-Submission (Applicant/Respondent No. 5) | Sub-Submission (Respondent No. 1) | Sub-Submission (Other Respondents) |
|---|---|---|---|
| Modification of Order dated 21.09.2021 |
✓ Supplementary chargesheet by EOW and SFIO report show fraudulent activities by ISSL and Allied. ✓ Mutual funds rightfully belong to Dalmia Cement. ✓ Dalmia Cement is financially sound and should not be subject to stringent conditions. ✓ Request for return of original bank guarantee of ₹344.07 crores. |
✓ Conditions imposed in order dated 21.09.2021 are justified. ✓ EOW chargesheet is based on a prior SEBI order. ✓ SFIO report is not final. |
✓ Opposed any further modification of the order dated 21.09.2021. |
Issues Framed by the Supreme Court
The primary issue before the Supreme Court was:
- Whether the order dated 21.09.2021, regarding the conditions for the release of mutual funds, should be further modified.
Treatment of the Issue by the Court
| Issue | Court’s Decision | Reasoning |
|---|---|---|
| Whether the order dated 21.09.2021 should be further modified | Modified | The court considered the supplementary chargesheet filed by the EOW and the financial soundness of Dalmia Cement. The court replaced the requirement of ₹300 crore unencumbered asset security with a corporate guarantee of the same amount. |
Authorities
The court considered the following:
- Previous orders of the Supreme Court in the same case, specifically the orders dated 27.08.2019, 16.03.2021, and 21.09.2021.
- Supplementary chargesheet submitted by the Economic Offences Wing (EOW).
- Report of the Serious Fraud Investigation Office (SFIO).
The court did not cite any specific case laws or legal provisions in this order.
Judgment
| Submission | How the Court Treated the Submission |
|---|---|
| Dalmia Cement’s request for modification based on EOW chargesheet and SFIO report. | The court acknowledged the supplementary chargesheet and the findings of the EOW and SFIO, which indicated fraudulent activity by ISSL and Allied. |
| Dalmia Cement’s financial stability argument. | The court noted Dalmia Cement’s strong financial position and accepted the argument that stringent conditions were inequitable. |
| ISSL’s argument against modification. | The court did not accept the argument that the EOW chargesheet was based on a prior SEBI order, and it considered the supplementary chargesheet as a significant new development. |
| Other respondents’ opposition to modification. | The court did not accept the opposition of other respondents and modified the order in favour of Dalmia Cement. |
What weighed in the mind of the Court?
The Supreme Court’s decision was influenced by several key factors:
- Supplementary Chargesheet: The court gave significant weight to the supplementary chargesheet filed by the EOW, which indicated fraudulent activities by ISSL and Allied. This was a new development that had not been considered in previous orders.
- Financial Stability of Dalmia Cement: The court took into account the fact that Dalmia Cement is a financially sound public limited company with a strong balance sheet. This made the requirement of a substantial bank guarantee and unencumbered asset security seem excessive.
- Ownership of Mutual Funds: The court reiterated that the mutual funds rightfully belonged to Dalmia Cement and that they should be given custody of the same.
| Sentiment | Percentage |
|---|---|
| Supplementary Chargesheet | 40% |
| Financial Stability of Dalmia Cement | 35% |
| Ownership of Mutual Funds | 25% |
| Category | Percentage |
|---|---|
| Fact | 40% |
| Law | 60% |
Logical Reasoning
Judgment
The Supreme Court modified its previous order dated 21.09.2021. The court replaced the requirement of furnishing a security of ₹300 crores of an unencumbered asset with a corporate guarantee of the same amount. The court held that the bank guarantee of ₹344.07 crores furnished by Dalmia Cement would be discharged once they fulfilled the new conditions to the satisfaction of the Trial Court. The court clarified that any observations made in the order would not affect the merits of the case, and the appeals would be heard on their merits.
The court observed that, “In our view, the subsequent supplementary chargesheet submitted by the EOW, and relied upon by the learned counsel for the petitioner, ought not to be ignored while considering this matter.”
The court further stated, “It is not disputed that the petitioner has, in terms of the order dated 16.03.2021, complied with the condition of furnishing bank guarantee of Rs.344.07 Crores.”
The court also noted, “Keeping in view the aforesaid facts and circumstances, we are of the opinion that the operative part of the order dated 21.09.2021 deserves to be modified.”
Key Takeaways
- The Supreme Court is willing to modify its orders based on new evidence, such as a supplementary chargesheet filed by a law enforcement agency.
- The financial stability of a party is a relevant factor when determining the conditions for the release of assets.
- Corporate guarantees can be considered as an alternative to unencumbered asset security.
- The court emphasized that the observations made in the order were not to affect the merits of the case.
Directions
The Supreme Court directed that:
- The applicant/Respondent No. 5 (Dalmia Cement) shall furnish a bank guarantee for ₹100 crores.
- The applicant/Respondent No. 5 shall furnish a corporate guarantee to the extent of ₹300 crores.
- The bank guarantee of ₹344.07 crores already furnished by the applicant/Respondent No. 5 shall be discharged upon fulfilling the new conditions to the satisfaction of the Trial Court.
Development of Law
The ratio decidendi of this case is that in matters of release of assets, the court will consider new evidence, such as a supplementary chargesheet, and the financial stability of the party seeking the release. The court also clarified that corporate guarantees can be accepted as an alternative to unencumbered asset security. This judgment modifies the previous position of the court by relaxing the conditions for release of mutual funds, taking into account the new developments in the case.
Conclusion
The Supreme Court modified its earlier order, allowing Dalmia Cement to replace the requirement of providing a security of unencumbered assets worth ₹300 crores with a corporate guarantee of the same amount. This decision was based on the supplementary chargesheet filed by the EOW, which indicated fraudulent activities by other parties, and the financial stability of Dalmia Cement. The court also directed the release of the original bank guarantee of ₹344.07 crores upon compliance with the new conditions.