SEBI imposes Rs 11 lakh fine on IIFL Securities for non-compliance

SEBI has found several compliance issues at IIFL Securities. The regulator noticed that the broker was involved in unauthorised fund-based arrangements that involved borrowing funds from clients, a practice that is not permitted under current regulations. SEBI found that IIFL Securities had transferred Rs 17.43 crore to 136 clients under these arrangements at interest rates of around 4-5 per cent per annum. Even though the clients had instructed the broker to make fixed deposits, such deposits were not made and instead the funds were used for trading purposes and margin requirements.

The SEBI order highlighted that IIFL Securities had violated multiple provisions relating to margin trading and management of client funds. This included misreporting of client book balances, exceeding the maximum permissible exposure limit for margin trading funds and mishandling margin requirements. It was further found that the broker was imposing penalties for short reporting to clients, a practice prohibited under SEBI guidelines. The violations primarily related to the provisions of the Securities Contracts (Regulation) Rules, 1957, where Rule 8(3)(f) was violated. This rule mandates that securities brokers not engage in fund-based activities outside the scope of their authorised brokerage services.

The violations also included SEBI (Stock Brokers and Sub-Brokers) Regulation, 1992, Rule 9(f), which requires brokers to adhere to a specified Code of Conduct and exercise due care and skill in conducting their business.

SEBI found that IIFL Securities had failed to settle client funds and securities on time in several instances. In 29 of the 96 samples reviewed, there were delays exceeding 90 days and incorrect stop notices were issued. This failure was in violation of SEBI guidelines as per circulars dated December 3, 2009, September 26, 2016 and June 16, 2021.

The order noted insufficient reconciliation of clients’ securities between demat accounts and back office records. This failure in reconciliation of 1,835 shares worth Rs 11.69 lakh was in violation of SEBI circular dated April 17, 2008.

SEBI has noticed that IIFL Securities failed to close certain client margin accounts within the stipulated time. Despite providing certain explanations, the delay in closing these accounts was in violation of SEBI circulars dated February 25, 2020 and July 29, 2020.

It was found that the broker had transferred securities to the unpaid securities accounts of clients who had positive balance in their books of accounts, in violation of SEBI guidelines dated June 20, 2019.

The circulars include SEBI/MIRSD/SE/Cir-19/2009 dated December 3, 2009, which prescribes requirements for monthly and quarterly settlement of client funds and securities. The company was found to be non-compliant with SEBI/HO/MIRSD/MIRSD2/CIR/P/2016/95 dated September 26, 2016, which relates to enhanced supervision of stockbrokers and depository participants. Further violations were noted in SEBI/HO/MIRSD/DOP/P/CIR/2021/577 dated June 16, 2021, regarding compliance with management of client funds and securities. IIFL has also failed to comply with SEBI circular MRD/DoP/SE/Cir-11/2008 dated April 17, 2008, which mandates accurate reconciliation of stocks, and SEBI/HO/MIRSD/DOP/CIR/P/2020/28 dated February 25, 2020, regarding closure of clients’ collateral accounts. Additional non-compliances were noted in SEBI/HO/MIRSD/DOP/CIR/P/2020/143 dated July 29, 2020, which further requires proper management of clients’ collateral accounts.

SEBI has stated that IIFL Securities is required to comply with all SEBI regulations and stock exchange guidelines. The identified deficiencies have been considered as serious violations that undermine the integrity and transparency of securities trading. SEBI has observed that the purpose of these regulations is to prevent malpractice and promote ethical conduct in the securities market. As a registered intermediary, IIFL Securities has had to demonstrate a high level of professionalism and compliance with the regulations.

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