Sebi bars IIFL Securities from taking new business for 2 years
Mumbai, June 20, 2023
Markets regulator Sebi on Monday barred IIFL Securities (formerly India Infoline), one of the leading domestic broking houses, from taking on new clients for two years for violating regulatory norms relating to segregation of clients’ funds and for improper marking of clients’ bank accounts. In its 64-page order, Sebi showed how IIFL Sec had used funds of its clients to meet its own fund obligations from proprietary trading. Sebi also said that the broker had used funds of investors with credit balance to meet obligations of investors with debit balance.
In simple terms, in this case suppose Client A of IIFL Sec had Rs 1,000 in his account. At the same time, another of its client, Client B had to pay Rs 500 to the broker while because of IIFL Sec’s own trading obligations, it had to pay Rs 300. The broker used Rs 800 from Client A’s Rs 1,000 with it to settle Rs 500 of Client B and Rs 300 of its proprietary trading obligation. Under Sebi rules such usages of funds of one client for meeting obligations of another is illegal. IIFL Sec has been punished for indulging in such practices.
Sebi prohibited IIFL Sec “from taking up/onboarding any new client for a period of two (2) years in respect of its business as a stock broker.” The order was based on two enquiry reports and six inspections by its officers. Sebi had considered cancellation of the certificate of IIFL Sec as a broker but considering some other factors, it refrained from doing that, it said in the order.
For market players, the order brought back memories of Karvy Stock Broking, though to a lesser magnitude. In the case of Karvy Stock Broking, the brokerage house, over several years, had diverted its clients’ money and securities for growing the group’s other businesses.
Sebi came down heavily on IIFL Sec because of repeat violations of the same regulatory norms which were first observed in 2014 and then again in 2017.
In its order against IIFL Sec, Sebi wholetime member S K Mohanty said that “the fact of lack of care and diligence” was clearly visible “in the light of the fact that despite Sebi finding that (IIFL Sec) was misusing the funds of its credit balance clients for settlement of its proprietary trades as well as the trades of its debit balance clients during the period of April 2011 to June 2014, the said violations were again noticed during March 2017 inspection for the period of (fiscals) 2015-16 and 2016-17.”
Sebi, however, pointed out that in recent years IIFL Sec had been taking steps to correct its wrongdoings and the said violations had not continued now. “In such circumstances, while action against (IIFL Sec) is necessary to be taken in the light of gravity of violations committed by it, a direction for the cancellation of certificate would be too disproportionate a punishment for not only (IIFL Sec) itself but also to its clients, both retail and institutional, as well as act antagonistic to the development of the securities market at a whole,” the order noted.
[The Times of India]
