Market regulator Securities and Exchange Board of India (SEBI) has imposed a penalty of Rs1 crore on IIFL Securities (IIFL) Ltd for violating regulations in 2014. SEBI had conducted multiple audits of IIFL's books of accounts and discovered that the company had violated the SEBI circular of 1993 which covers failing to segregate its own funds from client funds, misusing client funds' credit balance for debit balance client funds and not appropriately designating client bank accounts.
SEBI performed a 'Thematic Inspection' at IIFL Securities from 30-31 January 2014 to 3 February 2014 and discovered that 26 of the 45 customer bank accounts inspected were not named as client accounts. SEBI has said in an official order that “During this inspection, analysis with respect to maintenance of separate bank and demat accounts for clients and proprietary funds/securities was carried out. In this regard, it was observed that out of the 45 clients bank account examined, 26 client bank accounts were not titled as 'client account'."
“Subsequently, in its response, the Company informed SEBI that it had submitted the request to its bankers for changing the title of the aforesaid 26 client accounts to “client account" and provided supporting document with respect to the same. The Company also informed SEBI that out of the 45 client accounts examined most of the client accounts have been designated as client account. However, on perusal of the aforesaid supporting document, it was observed that 3 client bank accounts were still in the process of changing the title to “client bank account"," said SEBI.
SEBI has also claimed that “It was also observed during the inspection that BSE had issued a warning to the Company with respect to the aforesaid issue, however despite the BSE warning, it was observed that the Company had failed to change the title of the bank accounts dealing with client transactions." In light of the foregoing, the company was accused of violating the SEBI circular 1993 regulations by neglecting to mark bank accounts used for client transactions as client accounts.
SEBI, NSE (National Stock Exchange) and BSE (Bomaby Stock Exchange) performed a combined investigation and IIFL submitted a list of 115 bank accounts that it was using for its own purposes during the comprehensive inspection. Funds were frequently transferred from client bank accounts to the Citi Bank pool/control account which IIFL manages and controls as its own bank account, according to the results of the examination. For the violation, SEBI has stated that “In light of the above paragraph, it was alleged that IIFL has violated provisions of the SEBI 1993 Circular by is mixing its own funds with its client funds in the following manner: (i) by transferring client funds and its own funds to a common account i.e., Citi Bank Pool/Control Account; and (ii) by using the Citi Bank Pool/Control Account for its own purposes."
Along with the CitiBank pool/control account, an account with Axis Bank was investigated during the inspection since the company told the examining team that the aforementioned account is also a pool account. During the examination, however, it was discovered that, in addition to the funds being transferred to the Axis Bank pool account from all Axis Bank accounts and from client dividend accounts, the Axis Bank pool account was also being utilised by IIFL for other activities.
“In light of the above, it was alleged that the Company has violated provisions of the SEBI 1993 Circular by mixing its own funds with its client funds by using the Axis Bank Pool Account for its own receipts and payments along with using it for pooling of client funds and dividends," SEBI has said in an official notice.
The company also used an ICICI Bank account for the following segments: BSE cash/futures and options/currency derivatives, NSE currency derivatives/futures and options, and MCX-SX currency derivatives/ cash/futures and options, according to the examination. The company utilised a ICICI Bank account for the following segments: BSE cash/futures and options/currency derivatives, NSE currency derivatives/futures and options, and MCX-SX currency derivatives/ cash/futures and options, according to the examination. During the investigation, the company claimed that the HDFC Bank account was also utilised as a pooling account for funds transferred by the company from various client accounts.
According to the regulation 23D of SEBI “If any person, who is registered under section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) as a stock broker or subbroker, fails to segregate securities or moneys of the client or clients or uses the securities or moneys of a client or clients for self or for any other client, he shall be *[liable to a penalty which shall not be less than one lakh rupees but which may extend to one crore rupees]."
As a result, the adjudicating officer has said in an official notice that “After taking into consideration all the facts of the case and the contentions of the Noticee, in exercise of powers conferred upon me under section 23-I(2) of SCRA read with rule 5 of the SCRA Adjudication Rules, I hereby impose a penalty of Rs. 1,00,00,000/- (Rupees One Crore Only) upon the Noticee i.e., India Infoline Limited (now known as IIFL Securities Ltd.) under section 23D of SCRA for violation of the provisions of SEBI 1993 Circular."