SEBI Slaps 2-Year Ban on IIFL Securities from Signing New Broking Clients

SEBI Slaps 2-Year Ban on IIFL Securities from Signing New Broking Clients

The Securities and Exchange Board of India (SEBI) has banned brokerage IIFL Securities from onboarding new clients for two years and held them guilty for mixing client’s funds with proprietary funds, for using credit-balance client accounts to settle obligations of debit-balance client accounts, and for using credit-balance client accounts to settle proprietary-trade obligations.

The market regulator had conducted a thematic inspection of the books of accounts of IIFL Securities Limited- Noticee from 30 January to 3 February, 2014, during which the records and the processes of IIFL from 1 April, 2011, to 31 December, 2013, were inspected.

The purpose of the said inspection was to examine as to whether IIFL was working in compliance with the provisions of the SEBI Circular dated 18 November, 1993 (hereinafter referred to as the “SEBI 1993 Circular”) as well as SEBI Circular dated 17 April, 2008, as far as segregation of funds and securities of clients were concerned.

IIFL Securities submitted that it has taken corrective measures. It has transferred its proprietary trades to a completely different stock broking entity to eliminate any chance of mixing of its own trading funds with clients’ funds or funding of such proprietorship trades with clients' funds.

It has restructured its business by separating all its investment-related activities from its stock broking business. Its investment-related activities have been transferred to the holding company of IIFL viz. IIFL Holdings Ltd. and the stock broking business has been kept with IIFL Securities.

The brokerage also submitted that it has been following the provisions of Enhanced Supervision Circular dated 26 September, 2016 in letter and spirit since the day it had come into force i.e., 1 July, 2017.

The inspection revealed that IIFL had not nomenclated 26 of its 45 clients’ accounts as ‘client account’ in bank record despite issuance of a warning by BSE.

SEBI in its probe found that IIFL was following a complicated procedure of transfer of funds wherein, it had opened four accounts with Axis Bank, Citi Bank, HDFC Bank and ICICI Bank, all were nomenclated as ‘control accounts.’ IIFL was collecting funds of its own as well as of its clients in the aforesaid four accounts, before transferring funds to ‘Exchange Settlement Accounts’, maintained by IIFL.

Thus, SEBI held that IIFL was mixing funds of its own with its clients’ funds before transferring them in ‘Exchange Settlement Accounts’ and was also found making payments for its own overheads and investments from the said control accounts.

On finding evidence of mixing client funds and for using client funds for settling obligations of proprietary account, the market regulator launched supplementary inspections of records between 1 April, 2011 and 30 June, 2014.

In the third supplementary inspection, which took data for 695 trading days, IIFL was found to have misused the credit clients’ funds for the settlement obligation of debit balance clients on 687 days which was 98.85% of the total aforesaid sample days. At the same time, on 29 days, IIFL was also found to have misused the funds of credit clients for the settlement obligation of proprietary trades.

The Whole Time Member (WTM) S.K. Mohanty in his order stated that the, “Noticee has flagrantly violated the provisions of SEBI 1993 Circular in various ways to clearly disregard the basic premise of the said circular both in letter and spirit in complete defiance of Regulatory instructions.”

The SEBI noted that the Noticee firstly did not assign its accounts appropriate nomenclature wherein it was keeping clients’ monies so as to clearly label them as ‘client accounts.’ Additionally, it was mixing clients’ funds with its own funds before using those mixed funds for its own proprietary usage. In the end, it was using funds of its credit balance clients’ to not only fund trades of its debit balance clients but also to fund its own trades, SEBI remarked.

Therefore, the SEBI concluded that, “This clearly demonstrates an utter disregard for the provisions of SEBI 1993 Circular by the Noticee at least during the period of April 01, 2011 to January 31, 2017. The said disregard and violation of provisions of SEBI 1993 Circular has further have, as a consequence, led to the violation of Clauses A (1), A (2) and A (5) of Code of Conduct for Stock Broker as given in Schedule II read with Regulation 9(f) of Stock Brokers Regulations.”

Accordingly, the SEBI barred IIFL Securities from onboarding any new client for a period of two years, on the ground of misusing of client funds that came to light in 2013-2014.