Mandatory Obligation for Stock Brokers to preserve records so as to produce the same in case of dispute

SEBI: Mandatory Obligation for Stock Brokers to preserve records to produce in case of dispute

The Adjudicating Officer (AO) of the Securities and Exchange Board of India (SEBI) imposed a penalty of Rs. 4 lakhs on M/s Yuvraj Securities (Yuvraj/ Noticee) for violations of Securities Contracts (Regulation) Act, 1956 (SCRA) and various SEBI Circulars revolving around mis-utilization of credit balance clients' funds, pledging of clients securities and non-segregation of client's funds, failing to settle running account, Monthly/ quarterly settlement of fund & securities, Incorrect Reporting of enhanced supervision data, etc.

In this matter, SEBI along with National Stock Exchange Limited (NSEL) conducted a comprehensive inspection of the Noticee. Later, SEBI initiated adjudication proceedings against the Noticee for violations of SCRA and various SEBI Circulars.

Since the Noticee did not submit any reply, the AO moved ahead with the observations. It was noted that the Noticee had utilized the funds of credit balance clients towards meeting the obligations of debit balance clients.

The AO stated very clearly that the stock broker can pledge securities of only debit balance clients and that too, to the extent of raising funds equivalent to the respective clients' obligation. However, the Noticee had pledged the securities of the clients with credit balance or NIL balance in the instant case and the same had also been admitted by the Noticee.

Not only this, but it was also affirmed that there were several instances of fund transfer between broker's client bank accounts and own/proprietary bank accounts. There were12 instances of fund transfers between brokers' client bank accounts and own/proprietary bank accounts aggregating to Rs. 67.01 lakhs.

It was noted that individual client's funds were being mixed with brokers self-account where Noticee used funds of credit balance clients for the benefit of debit balance clients, pledging of clients securities and segregation of client funds. Noticee had also failed to settle running account.

According to one Circular, the Noticee was to execute trades of clients only after keeping evidence of the client placing such order. The submission of the Noticee that such records were inadvertently deleted was rejected more so given the fact that such failure would facilitate scope for illegal trades through the brokers.

The fact that the action of the Noticee of letting such investors who failed to clear their dues within stipulated time adversely impacted the settlement process of the Broker, was not viewed leniently by the AO.

One of the Circulars stipulated a mandatory obligation to upload clients' fund balance and securities balance on Stock Exchange Systems. The Noticee had disregarded the same by incorrectly reporting fund balances of 16 clients, and securities balance of 1 client. These were the ways in which the Noticee had violated the aforementioned regulations and circulars and hence, the monetary penalty had been imposed.