In a major development, IIFL Securities, the broking arm of the IIFL Group, witnessed a massive decline in its share price by nearly 19.30%, falling to ₹57.50 per share, during Tuesday's intraday trade. The sharp drop came in response to the capital markets regulator, SEBI, imposing a two-year ban on the broking firm from onboarding any new clients due to the “misutilization of client funds”.
In its notice dated June 19, SEBI revealed that it had conducted six inspections of the books of account of IIFL Securities, for the period April 2011 to January 2017. The purpose of the inspection was to assess the company's compliance with the SEBI Circulars of 1993 and 2008, specifically focusing on the segregation of funds and securities of clients.
The inspection identified several areas of non-compliance, including the failure to segregate its own funds from clients' funds, the misuse of credit balances in clients' funds for the benefit of clients with debit balances, and the inappropriate designation of client bank accounts.
The SEBI identifies that out of the 45 client bank accounts examined during inspections, 26 client bank accounts were not titled as "client account". This was even though BSE had issued a warning to IIFL.
"While the IIFL had submitted evidence of renaming of certain accounts as "client account", the Enquiry Report I found out that there was one account with Citi Bank, which the Noticee has claimed to have been closed, but no evidence showing closure of the said account has been submitted by the Noticee."
"Similarly, IILF didn’t make any submissions regarding its account with South Indian Bank. In view of this, it has been alleged that IIFL Securities has violated provisions of the SEBI 1993 Circular by failing to designate bank accounts used for client transactions as client accounts," said SEBI Whole Time Member SK Mohanty in his 64-page final order.
The funding of debit balance clients' trades using funds of credit balance clients has been done by IIFL on a total of 795 trading days out of 809 total trading days covered for examination during the inspection period from April 1, 2011, to June 30, 2014, and on 30 trading days during April 1, 2015, to January 31, 2017, SEBI noted.
At the same time, the brokerage company had also used the funds of clients having credit balances to fund its own proprietary transactions on 42 trading days during the inspection period from April 2011 to June 2014.
In addition, the broking firm also breached provisions of the code of conduct prescribed under stock broker rules, which every registered stockbroker is obligated to adhere to, SEBI noted.
IIFL Securities said in an exchange filing on Monday that it is in the process of preferring an appeal against the SEBI order before the Securities Appellate Tribunal.
“It may be noted that the order does not affect the company’s existing business with the existing clients. The company has always met all its obligations towards exchanges and clients on time and has always followed a compliance-first approach and carried out business in full compliance in letter and spirit with extant laws and regulations,” IIFL said in a BSE filing.
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