SEBI Imposes ₹4 Lakh Penalty On LKP Securities Ltd For Violations In Pre-Trade Authorisation Compliance

SEBI's investigation of LKP Securities followed an inspection carried out in conjunction with the Bombay Stock Exchange (BSE), National Stock Exchange of India Ltd (NSE), and Multi Commodity Exchange of India Limited (MCX).

The primary issue identified during the inspection was LKP Securities' failure to maintain evidence of pre-trade authorisation for 103 clients. The regulatory provisions mandate that all stockbrokers must execute trades for clients only after obtaining and retaining verifiable records of the clients' order placement. These records can include physical documents, telephone recordings, or email confirmations. SEBI found that LKP Securities had only provided post-trade confirmations rather than the required pre-trade authorisations.

LKP Securities attempted to explain these lapses by stating that contract notes for 25 clients were sent physically but proof of delivery was lost due to a shift in their corporate office. For two clients, the company claimed to have enclosed trade confirmations and for 76 other clients, it stated that office visits for order placements could not be traced. Moreover, the stockbroker provided post-trade confirmations for two more clients. However, these explanations and the accompanying documents failed to satisfy SEBI which held that LKP Securities misclassified post-trade confirmation records as pre-trade and failed to provide the necessary pre-trade authorisation evidence.

The inspection further revealed that out of 86 instances examined during the inspection period, LKP Securities failed to maintain proper pre-trade authorisation proof for 15 clients selected as a sample. Instead of providing pre-order confirmations, the broker submitted post-trade confirmations which do not comply with the regulatory requirements. LKP Securities acknowledged that it directed its authorised person to maintain physical order placement proofs moving forward but this corrective action did not address the deficiencies identified during the inspection period.

After reviewing the broker's responses, SEBI held that LKP Securities contravened multiple provisions of securities law, particularly the SEBI Circular No. SEBI/HO/MIRSD/DOP1/CIR/P/2018/54 dated March 22, 2018, and the SEBI Master Circular dated May 17, 2023 which are designed to prevent unauthorized trading by stockbrokers.

The regulatory framework mandates that stockbrokers must maintain legally verifiable records before executing any client orders.

As a result, SEBI imposed a monetary penalty on LKP Securities under Section 15HB of the SEBI Act. This section allows SEBI to impose penalties for violations of its regulations, taking into consideration factors such as the nature and gravity of the violation, the level of harm caused, and the frequency of the violation.