Brokerage IIFL Securities has been prohibited by the market regulator from accepting new clients for a duration of two years. This action was taken due to the firm's commingling of clients' funds with proprietary funds, utilizing credit-balance client accounts to fulfill obligations of debit-balance client accounts, and using credit-balance client accounts to settle proprietary-trade obligations.
The Securities and Exchange Board of India (Sebi) in its order dated June 19 said, “the Noticee has flagrantly violated the provisions of SEBI 1993 Circular in various ways to clearly disregard the basic premise of the said circular both in letter and spirit in complete defiance of Regulatory instructions”.
It added, “The Noticee firstly didn’t assign its accounts appropriate nomenclature wherein it was keeping clients’ monies so as to clearly label them as ‘client accounts’. Additionally, it was mixing clients’ funds with its own funds before using those mixed funds for its own proprietary usage. In the end, it was using funds of its credit balance clients’ to not only fund trades of its debit balance clients but also to fund its own trades.
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This clearly demonstrates an utter disregard for the provisions of SEBI 1993 Circular by the Noticee at least during the period of April 01, 2011 to January 31, 2017. The said disregard and violation of provisions of SEBI 1993 Circular has further have, as a consequence, led to the violation of Clauses A(1), A(2) and A(5) of Code of Conduct for Stock Broker as given in Schedule II read with Regulation 9(f) of Stock Brokers Regulations.”
The market regulator conducted a thematic inspection of the books of accounts of IIFL from January 30 to February 03, 2014, during which the records and the processes of IIFL from April 01, 2011, to December 31, 2013, were inspected.
The purpose of the said inspection was to examine as to whether IIFL was working in compliance with the provisions of the SEBI Circular ref.
SMD/SED/CIR/93/23321 dated November 18, 1993 (hereinafter referred to as the “SEBI 1993 Circular”) as well as SEBI circular ref. MRD/DoP/SE/Cir11/2008 dated April 17, 2008, as far as segregation of funds and securities of clients are concerned.
The order stated that the inspection revealed that IIFL had not nomenclated 26 of its 45 clients’ accounts as ‘client account’ in bank record despite issuance of a warning by BSE.
"SEBI found out that IIFL was following a complicated procedure of transfer of funds wherein, it had opened four accounts with Axis Bank, Citi Bank, HDFC Bank and ICICI Bank, all were nomenclated as ‘control accounts’. IIFL was collecting funds of its own as well as of its clients in the aforesaid four accounts, before transferring funds to ‘Exchange Settlement Accounts’, maintained by IIFL. Thus, IIFL was mixing funds of its own with its clients’ funds before transferring them in ‘Exchange Settlement Accounts’ and was also found making payments for its own overheads and investments from the said control accounts," it added.
On finding evidence of mixing client funds and for using client funds for settling obligations of proprietary account, the market regulator launched supplementary inspections of records between April 1, 2011 and June 30, 2014.
In the third supplmentary inspection, which took data for 695 trading days, " IIFL was found to have misused the credit clients’ funds for the settlement obligation of debit balance clients on 687 days which was 98.85% of the total aforesaid sample days", stated the order.
"At the same time, on 29 days, IIFL was also found to have misused the funds of credit clients for the settlement obligation of proprietary trades," it added.
IIFL Securities submitted that it has taken corrective measures. It has transferred its proprietary trades to a completely different stock broking entity to eliminate any chance of mixing of its own trading funds with clients’ funds or funding of such proprietorship trades with clients' funds.
It has restructured its business by separating all its investment-related activities from its stock broking business. Its investment-related activities have been transferred to the holding company of IIFL viz. IIFL Holdings Ltd. and the stock broking business has been kept with IIFL Securities. "Therefore, there can be no investment either in group companies or in any other place from the accounts of the Noticee," noted the order.
The brokerage also submitted that it has been following the provisions of Enhanced Supervision Circular dated September 26, 2016 in letter and
spirit since the day it has come into force i.e. July 01, 2017.
(This is a developing story. Please check for updates.)
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