MISL, a SEBI-registered stock broker, came under scrutiny after the National Stock Exchange (NSE), during its off-site supervision and onsite inspection, found that the broker had falsified its register of securities (RoS) by making incorrect entries relating to transfers of client securities.
The regulator found that MISL had collected securities and funds from certain clients while assuring them periodic returns. At the same time, the broker incurred substantial losses in the futures and options (F&O) segment. According to SEBI, MISL attempted to meet its obligations by selling securities belonging to other clients, resulting in the misuse and misrepresentation of client funds and securities.
One of the most serious findings was a shortfall of ₹95.29 crore in client securities across 288 scrips. The forensic audit also identified securities worth ₹113.03 crore across 323 scrips that were misappropriated. SEBI rejected MISL's argument that securities recoverable from certain clients could be adjusted against the shortfall, observing that recoverable positions could not substitute for securities actually payable to clients.
SEBI also found that MISL used manual adjustments in its accounting system to conceal securities deficits. In the accounts of 118 clients, negative securities holdings of ₹113.03 crore were recorded across 323 scrips. For the top 16 clients, negative holdings of ₹111.12 crore were accompanied by manual margin adjustments of ₹116.65 crore and manual transfer adjustments of ₹6 crore. The regulator said these entries artificially inflated securities holdings and facilitated the sale of other clients' securities.
MISL was also found to have diverted client funds for purposes not permitted under the regulatory framework. During the audit period, MISL received net cash settlements of ₹126.31 crore from exchanges against the sale and purchase of clients' securities. However, the sale proceeds were not transferred to the respective clients. The forensic audit indicated potential fund misappropriation of ₹136.29 crore.
SEBI rejected MISL's argument that transferring funds from its cash settlement account to its F&O settlement account did not constitute misappropriation because the funds remained within the company. SEBI said client funds had to remain segregated and could not be used to meet obligations in another segment. It also pointed to ₹10.47 crore used as advances for purchasing flats, saying this could not be treated as a legitimate use of client funds.
As of 24 January 2020, MISL had a shortfall of ₹79.61 crore in available funds. This comprised net creditors of ₹30.63 crore, bank overdraft balances of ₹49.09 crore and a margin of ₹0.11 crore with the BSE. SEBI said the shortfall demonstrated that the broker did not maintain adequate funds to meet its obligations towards clients.
The order also highlighted several accounting irregularities. These included 21 transactions involving 13 client accounts in which securities quantities were deleted or reduced, affecting holdings worth ₹23.16 crore. In another 35 transactions totalling ₹8.87 crore, receipts from group companies were recorded as client receipts. SEBI also found incorrect ledger adjustments, including ₹34.71 crore in bad-debt write-offs related to F&O losses.
SEBI further examined periodic payments made to clients. After analysing 78 of 197 VD group clients, it found that MISL had made periodic payments totalling ₹16.87 crore to 50 clients. Of these, 47 clients had incurred F&O losses totalling ₹98.60 crore. SEBI rejected MISL's argument that another director, Vikram Duggal, was solely responsible for these transactions, holding that the activities were carried out on the company's behalf.
Regarding Mr Sachdeva's role, SEBI noted that he was one of MISL's two WTDs and held a 37.50% stake in the company. The regulator said the evidence established his financial and managerial involvement and concluded that he was responsible for the conduct of the company's business when the violations occurred.
Proceedings against former WTD Dharmendra Kumar Arora were abated after SEBI was informed that he had died on 17 April 2021. However, NSE was allowed to take appropriate action against his assets for settling the claims of MISL clients.
SEBI has designated NSE as the lead exchange for settling claims of MISL's clients and investors. Assets of MISL and, to the extent permissible under law, those of Mr Sachdeva are to be used only for paying money and delivering securities to clients. Banks and depositories have also been directed to facilitate the settlement process.
The noticees have been restrained from accessing the securities market or buying, selling or otherwise dealing in securities, directly or indirectly, until NSE completes settlement of the claims. They have also been prohibited from disposing of or creating any charge over their assets without prior permission from NSE.
SEBI imposed a penalty of ₹7 lakh each on MISL and Mr Sachdeva, taking the total penalty to ₹14 lakh.
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