The Securities and Exchange Board of India (SEBI) on Monday prohibited IIFL Securities Limited from onboarding new clients for the next two years. The markets regulator had conducted an inspection of the books of accounts of IIFL during the period of January 30 to February 3, 2014, wherein the records and the processes of the stock broker during the period of April 1, 2011, to December 31, 2013, were inspected.
The purpose of the inspection was to examine whether the company was working in compliance with certain provisions of circulars by SEBI. However, it was noticed that the actions of IIFL were not in compliance with some provisions of a circular issued by the regulator.
Today, SEBI in its order said: "(IIFL) 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."
IIFL had 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.
The IIFL, the order stated, firstly didn't assign its accounts appropriate nomenclature wherein it was keeping clients' money so as to clearly label them as 'client accounts'. Additionally, it said, 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. This clearly demonstrates an utter disregard to the provisions of SEBI 1993 Circular by the Noticee at least during the period of April 01, 2011, to January 31, 2017."
The order stated that IIFL claims itself to be a large broker having thousands of retail clients and a number of institutional clients, to whom it provided services. In such a case, the order said, responsibility to follow the provisions of Securities Laws falls all the more on its shoulders as the final consequences of misuse of funds of its clients by a large broker like the IIFL would have been far graver as compared to the violations committed by some small level brokers
"...any default on the part of the Noticee (IIFL) would have affected the interest of a large number of clients-both retail and institutional, leading to a certain likelihood of a drastic fall in trust, in the functioning of securities market that SEBI has been trying to build over the last three decades."
The order further said that any such erosion of trust in the capital market would dissipate decades of efforts of the Government of India and SEBI to create a safe, reliable, and credible capital market in India and would possibly inflict a huge dent on the Indian economy as well.
"While the IIFL has brazenly contended that the misdeeds of it didn’t lead to default, as a regulator, SEBI is required to be proactive in stopping these kinds of mishaps and audacious misconduct from recurring," the order said. "SEBI cannot afford to be reactive and wait for a default to happen to take action upon such misdeeds as the Noticee is trying to persuade and impress upon me."