Market regulator Securities and Exchange Board of India (SEBI) has imposed a ₹7 lakh penalty on Jainam Broking Ltd for multiple compliance lapses, indulging in transfer of funds between client banks and own banks (transferring ₹3207.07 crore excess from own bank account to client bank account), inaccurate reporting of client funds, know-your-customer (KYC) deficiencies, incorrect risk-based supervision (RBS) reporting and several cybersecurity shortcomings.
In an order, Amit Kapoor, adjudicating officer (AO) of SEBI said, "I note that during investigation period 2 (IP2) on verification of bank books and monthly gross summary on fund reconciliation covering inspection period provided by notice (Jainam Broking), it was found that noticee has transferred funds from client to own bank account amounting to ₹30,052.15 crore and from own bank account to client bank account amounting to ₹33,261.22 crore. Net amount transferred from own bank account to client bank account was ₹3,209.07 crore."
SEBI's inspection found that Jainam Broking had transferred ₹30,052 crore from client bank accounts to its proprietary accounts during the second inspection period. At the same time, the broker transferred ₹33,261 crore from its own accounts to client accounts, resulting in a net movement of ₹3,209 crore towards client accounts.
Jainam Broking argued that there was no mutualisation of client funds, as the net flow was from its own accounts to client accounts and that client payout obligations had been met on time. SEBI, however, said transfers between client and proprietary accounts are subject to specific conditions and can be made only for legitimate purposes.
The regulator noted that the broker had failed to provide adequate supporting documents explaining the transfers. SEBI therefore concluded that Jainam Broking had violated requirements governing the segregation and permissible movement of client funds.
Incorrect Client Fund Reporting
SEBI also found that Jainam Broking had incorrectly reported the margin utilised for positions of credit-balance clients on four sample dates 4th, 11th, 18th and 25 February 2022. The value involved in the incorrect reporting was ₹47.13 lakh.
The broker blamed an error in its back-office system. SEBI rejected the explanation, observing that a system error did not absolve the broker of its responsibility to submit accurate information to the exchanges.
The regulator further found that Jainam Broking had provided additional exposure to clients whose debit balances remained unpaid beyond the permitted T+2+5 period. Out of 75 cases examined, 9 involving funded amounts of ₹59.69 lakh exceeded the requirement.
The broker attributed some cases to technical errors and argued that certain outstanding amounts were below ₹500 and related to demat, DP and late-payment charges. SEBI did not accept these explanations and held that the prescribed restrictions had been violated.
Thousands of Client Data Mismatches
The inspection also uncovered deficiencies in KYC and client records. KRA details for 13 clients had either not been updated within the prescribed period or were still under process.
More strikingly, SEBI found substantial mismatches between the broker's unique client code (UCC) database and its back-office records. These comprised 3,104 email-ID mismatches, 823 mobile-number mismatches and 530 cases where both email IDs and mobile numbers did not match.
Jainam Broking attributed the discrepancies to software errors during bulk uploading and said the records were subsequently corrected. SEBI nevertheless held that the reporting failures constituted violations.
₹50.88 Lakh Bank-balance Under-reporting
Jainam Broking was also found to have under-reported its bank balance by ₹50.88 lakh in its weekly enhanced-supervision report as of 30 September 2022.
The broker said the discrepancy arose because it followed the transaction-date methodology, while the bank statement also reflected a value date. SEBI held that the broker had used the wrong methodology.
The regulator additionally found discrepancies in client-level ledger balances for 20 clients out of 1,77, 383 reported balances. Jainam Broking cited institutional and inactive clients, technical issues and unposted charges. However, SEBI said adequate supporting documents were not provided and stressed that information submitted to exchanges must be accurate.
The broker was also found to have incorrectly reported user details for 11 trading terminals.
RBS Reporting Error Involving ₹66.56 Crore Brokerage
Another lapse related to risk-based supervision reporting.
For the period ending March 2022, Jainam Broking reported NSE brokerage of ₹27.10 crore, which SEBI said was ₹39.44 crore lower than the amount required to be reported. The broker also reported only ₹1.23 crore for MCX instead of the required aggregate figure.
The broker admitted that it had misunderstood the reporting requirement and had reported exchange-wise brokerage instead of the required aggregate figure.
Cybersecurity Framework Found Wanting
SEBI also flagged several cybersecurity deficiencies at Jainam Broking.
These included the absence of STQC certification for its trading and back-office vendor, inadequate planning for vulnerability assessments, failure to conduct VAPT for all critical IT assets, non-registration with CERT-In, failure to share CISO details with CERT-In and absence of a security operations centre (SOC).
The broker said VAPT had been conducted in April and December 2022 and submitted a vendor report. SEBI said the contents of the reports could not be verified and noted that STQC certification had not been provided.
Jainam Broking also admitted that its CISO was appointed only in December 2023, while the SOC was still under development. SEBI consequently held that the applicable cybersecurity requirements had not been complied with.
SEBI Imposes ₹7 Lakh Penalty
While deciding the penalty, SEBI said there was no quantifiable evidence to establish any disproportionate gain or unfair advantage arising from the violations. The regulator also said that the exact monetary loss, if any, suffered by investors or clients could not be established from the material available.
SEBI took note of the corrective measures undertaken by Jainam Broking after the inspection and the absence of any client complaint on record in the proceedings. However, it stressed that a registered intermediary is under a statutory obligation to comply with regulations, circulars and exchange requirements.
Consequently, SEBI imposed a ₹5 lakh penalty under Section 15HB of the SEBI Act and ₹2 lakh under Section 23D of the SCRA, taking the total penalty to ₹7 lakh.
