SEBI Bars IIFL Securities From Taking New Clients For Two Years

Market regulator SEBI has found that IIFL Securities misused and mixed client funds and has hence barred the brokerage from taking on new clients for two years.

"IIFL has flagrantly violated the provisions of SEBI's 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," SEBI said in its order.

The Securities and Exchange Board of India carried out six inspections against IIFL Securities between 2011 and 2017 to examine if the brokerage adhered to the rules on segregation of funds and securities of clients.

The investigation led SEBI to conclude four violations by IIFL, namely:

• Failure to appropriately nomenclate clients’ bank accounts.

• Mixing of its own funds with clients’ funds and use of those mixed funds for its own use.

• Misuse of funds by clients with credit balances for the benefit of clients with debit balances.

• Misuse of funds by clients with credit balances for settlement of proprietary trades.

Based on the findings, two enquiry proceedings were launched against the intermediary in 2017 and 2021. In the proceedings, it was found that 26 out of 45 bank accounts held by clients were not labelled as client accounts.

It was also found to be transferring client funds to a common pool account managed by the intermediary itself. This was being used for transactions undertaken by IIFL, including investments in mutual fund units and bonds, etc. Further, evidence was also found of IIFL utilising funds from clients with credit balances in favour of clients with debit balances.

However, according to IIFL, the circular under which it has been made liable did not come into existence until 2016, and therefore is applied retrospectively.

The account with Citibank was not categorised as a client account due to operational issues posed by the bank. The account with South Indian Bank was labelled as a client account subsequently, but was closed on Jan. 7, 2021. Therefore, the violation is merely technical in nature and does not warrant any punitive intervention, IIFL submitted.

However, according to SEBI, there is no way to ascertain the exact date on which the label of the bank account was changed. The corrective steps were only undertaken after the issuance of the inspection report, it said.

On transfer of the client's fund to the common pool, it was submitted by IIFL that the funds were meant for the settlement of the client's obligations and were therefore "money properly required for payment to or on behalf of clients".

SEBI, however, found IIFL using these funds for various sundry purposes other than dealing in securities. This is when the law requires them to separate the broker's funds from the client's funds. Further, they misused these funds for the benefit of clients with debit balances.

"Out of a sample of 105 days, IIFL misutilised the credit clients’ funds for the settlement obligation of debit balance clients for 101 days, which amounted to 96% of the total number of selected sample days."

IIFL submitted that it has transferred its proprietary trading to a different banner, 5paisa Capital Ltd.; there was no instance of IIFL undertaking proprietary trading, it said. However, data showed that it utilised client funds for the settlement obligations of its own proprietary trades.

In doing so, during the period of April 1, 2011 to Jan. 31, 2017, it violated the regulator's circular and regulations for stock brokers.

However, since 2017, IIFL Securities has demonstrated its attempts to atone itself by correcting its wrongdoings and has shown that the violations have not continued as of now, as the order has noted. No misuse of clients' funds or mixing of clients' funds with their own funds has been observed since March 2017. And so, the regulator has refrained from cancelling IIFL Securities' broker certificate, saying such an action would be too disproportionate a punishment.