The Securities Appellate Tribunal (SAT) has set aside the market regulator's order restraining IIFL Securities from taking new clients for a period of two years, and has reduced the penalty imposed on the brokerage to Rs 20 lakh from Rs 1 crore.
In the December 7 order, SAT stated that "there has been no misuse of client funds and by wrongly considering the non-funded portion of the bank guarantee as per the 2016 circular, an attempt has been made out to show that there was a misuse of client funds which, in our opinion, is patently erroneous".
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It added, "On account of the aforesaid, the direction of the WTM debarring the appellant under the Intermediaries Regulations from taking new client for a period of two years cannot be sustained".
On the penalty of Rs 1 crore imposed on the brokerage under Section 23D of the Securities Contracts(Regulation) Act (SCRA), the SAT order stated, "Since we have already held that there is no misuse of the clients funds and since there is no failure on the part of the appellant to segregate monies of the client nor monies of the client have been misused by the appellant for its own purposes, no penalty under Section 23D of the SCRA could be imposed."
However, the tribunal noted that the brokerage failed to change the nomenclature of the bank accounts of the client as required to be done under Sebi's 1993 circular.
The SAT order stated: "Even though, it is a technical breach and there is no misuse of the client funds, nonetheless, if something is required to be done in a particular manner and the same is not done in that fashion, then there is a violation of that circular. Considering the aforesaid that it is only a technical breach, we are of the opinion that in the given circumstances for the two show cause notices, a penalty of Rs 20 lakh in total would be sufficient for the purpose of this case."
On June 19, 2023, the Securities and Exchange Board of India (Sebi) had passed an order restraining the brokerage from onboarding new clients for two years, for misusing client funds.
Anand Kankani, a practising company secretary who specialises in securities law, said, "In the IIFL matter, the letter of law was to keep the clients and proprietary account segregated which was done but for the ease of operations; to make the payouts, the amounts that were debited from the clients' accounts were credited to the pool account. There was no violation of the law - neither letter nor spirit of the law; as from the pool account ultimately these were used for the payouts which are permitted by the circulars. Further procedural laws cannot be applied retrospectively and one cannot be expected to adhere to provisions whose clarifications or provisions are made subsequently."
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