SEBI Imposes Rs 11 Lakh Fine On IIFL Securities For Compliance Failures

SEBI found several compliance issues with IIFL Securities. The regulator noted that the broker engaged in unauthorized fund-based agreements which involved borrowing funds from clients, a practice not permitted under current regulations. SEBI identified that IIFL Securities had transferred Rs 17.43 crore to 136 clients under these agreements with interest rates around 4-5 percent per annum. Despite clients instructing the broker to create fixed deposits, such deposits were not made and instead funds were utilized for trading and margin requirements.

The SEBI order highlighted that IIFL Securities violated multiple provisions related to margin trading and client fund management. This included incorrect reporting of client ledger balances, surpassing the maximum allowable exposure limit for margin trading funds, and improper handling of margin requirements. Additionally, the broker was found to be passing penalties related to short reporting to clients a practice prohibited under SEBI guidelines. The breaches primarily involved the Securities Contracts (Regulation) Rules, 1957, where Rule 8(3)(f) was contravened. This rule mandates that securities brokers should not engage in fund-based activities beyond the scope of their authorized broking services.

The violations extended to the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992, Regulation 9(f), which requires brokers to adhere to a prescribed Code of Conduct and maintain due skill and care in their operations.

SEBI found that IIFL Securities failed to settle client funds and securities on time in several instances. There were delays exceeding 90 days in 29 out of 96 samples reviewed, and incorrect retention statements were issued. This failure contravened SEBI's guidelines outlined in circulars dated December 3, 2009, September 26, 2016, and June 16, 2021.

The order noted inadequate reconciliation of client securities between demat accounts and back office records. This failure to reconcile 1,835 shares valued at Rs 11.69 lakh was a breach of SEBI's circular dated April 17, 2008.

SEBI noted that IIFL Securities did not close certain client collateral accounts by the mandated deadline. Despite the submission of some explanations, the delay in closing these accounts violated SEBI circulars dated February 25, 2020, and July 29, 2020.

The broker was found to have transferred securities to the Client Unpaid Securities Accounts of clients who had a credit balance in their funds ledger, which contravened SEBI guidelines from June 20, 2019.

The circulars include SEBI/MIRSD/SE/Cir-19/2009 dated December 03, 2009, which outlines the requirements for monthly and quarterly settlement of client funds and securities. The company was found non-compliant with SEBI/HO/MIRSD/MIRSD2/CIR/P/2016/95 dated September 26, 2016, which deals with enhanced supervision of stock brokers and depository participants. Further violations were noted in SEBI/HO/MIRSD/DOP/P/CIR/2021/577 dated June 16, 2021, regarding compliance with client fund and security management. IIFL also failed to adhere to SEBI Circular MRD/DoP/SE/Cir-11/2008 dated April 17, 2008, which mandates accurate stock reconciliation, and the SEBI/HO/MIRSD/DOP/CIR/P/2020/28 dated February 25, 2020, concerning the closure of client collateral accounts. Additional non-compliance was noted with SEBI/HO/MIRSD/DOP/CIR/P/2020/143 dated July 29, 2020, which further requires the need for proper client collateral account management.

SEBI held that IIFL Securities was obligated to adhere to all SEBI regulations and stock exchange guidelines. The lapses identified were seen as serious breaches that undermined the integrity and transparency of securities trading. SEBI noted that the purpose of these regulations is to prevent wrongdoing and promote ethical conduct within the securities market. As a registered intermediary, IIFL Securities was expected to demonstrate high levels of professionalism and statutory compliance.

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