Market regulator Securities and Exchange Board of India (SEBI) has prohibited IIFL Securities Ltd, a stockbroker, from on-boarding new clients for the next two years.
In an order, SK Mohanty, whole-time member (WTM) of SEBI, says, "...while action against IIFL Securities is necessary to be taken in the light of the gravity of violations committed by it, a direction for the cancellation of certificate would be too disproportionate a punishment for not only IIFL Securities 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."
"While the past acts of IIFL Securities had not been in tune with the established prudent market practices or with the regulatory instructions and IIFL Securities has not conducted its affairs as a genuine market intermediary as unearthed during the repeated inspections conducted by SEBI, which have been already highlighted above at length, it has however now demonstrated its attempts to atone itself by correcting its wrongdoings and to suggest that the said violations have not continued as of now," the SEBI WTM says.
SEBI inspected the books of IIFL Securities for two years, from 1 April 2011 to 31 December 2013. It found that the actions of the stockbroker were not in compliance with the provisions of SEBI's 1993 circular read with clauses of the code of conduct for stockbrokers.
SEBI found that out of the 45 client bank accounts examined during inspections, 26 client bank accounts were not titled as 'client account' by IIFL Securities despite a warning issued by BSE.
"It was seen that funds were regularly being transferred from client bank accounts and clients' dividend accounts to the pool or control accounts of IIFL Securities, which were managed and controlled by IIFL Securities as its own bank account. At the same time, funds were transferred from IIFL Securities' own bank accounts to the same control accounts, where clients' funds were also being collected, and then to the settlement account of the stock exchange and clearing house," SEBI says.
The inspection team also observed that IIFL Securities used funds lying in these pool and control accounts for its own purposes, including investment in and redemptions of mutual fund units, investment in bonds, metal trust and IIFL income opportunities fund, transfer to and from IIFL Commodities and insurance, IIFL Wealth Management Ltd, IIFL Realty Ltd and foreign remittance expenses, among others.
After another thorough inspection, SEBI initiated two separate proceedings against IIFL Securities.
During the hearing, IIFL Securities submitted that it has already transferred its proprietary trades to a completely different stock broking entity, and therefore, there is no chance of either mixing its own trading funds with clients' funds or funding such proprietorship trades from the funds available with it from its clients.
It has also submitted that the IIFL group has already restructured its business, where all the investment-related activities have been transferred to IIFL Holdings Ltd and the stock broking business has been kept with IIFL Securities. There can be no investment either in group companies or in any other place from the accounts of IIFL Securities, it added.
Further, IIFL Securities submitted that it has followed the provisions of enhanced supervision circular dated 26 September 2016 in letter and spirit since the day it came into force from 1 July 2017. In support of this, IIFL Securities submitted that no finding of any such non-compliance has been noticed by regulators, viz., SEBI or the stock exchanges in any inspection after the implementation of the circular.
In the order, Mr Mohanty observed, "While IIFL Securities has brazenly contended that the misdeeds of it didn't lead to default, as a regulator, SEBI is required to be proactive in stopping these kinds of mishaps and audacious misconduct from recurring. SEBI cannot afford to be reactive and wait for a default to happen to take action upon such misdeeds as IIFL Securities is trying to persuade and impress upon me."
While disposing the enquiry proceedings and show-cause notices issued on 18th July and 4 July 2022 against IIFL Securities, SEBI prohibited the stockbroker from taking up or on-boarding any new client for the next two years.
