SEBI imposes INR 27 lakh penalty for regulation violation

SEBI imposes INR 27 lakh penalty for regulation violation

The Adjudicating Officer opined that the obligation of debtor clients was met with the funds of the creditor clients and therefore, the Noticee had misutilized the funds of the credit balance of clients

The Securities and Exchange Board of India (SEBI) has imposed a penalty of Rs 27 lakh on 19 January 2021 on the Noticee (Asit C Mehta Investment Intermediaries Ltd) under section 23D of the Securities Contracts (Regulation) Act, 1956 (SCRA) and section15HB of the SEBI Act.

Herein, SEBI, the National Stock Exchange (NSE), the Bombay Stock Exchange (BSE) and the Central Depository Services (India) Limited (CDSL) conducted a comprehensive joint inspection of the broking and depository participant operations of the Noticee. Noticee had been registered with SEBI in the capacity of a stockbroker and in the capacity of Depository Participant. The period of the inspection was from April 2017 to September 2018 (IP).

SEBI initiated adjudication proceedings against the Noticee in terms of Section 23D of SCRA and 15HB of Securities and Exchange Board of India Act, 1992 (SEBI Act) for the alleged violations of provisions of the SEBI Regulations/Circulars and NSE circulars.

The Adjudicating Officer (AO) opined that the obligations of debtor clients were met with the funds of the creditor clients and therefore, the Noticee had mis0utilised the funds of the credit balance of clients which amounted to an intermingling of funds contrary to the provisions of the SEBI circular no. SMD/SED/CIR/93/23321 dated 18 November 1993.

The AO noted that the said 1993 circular laid down comprehensive guidelines for stockbrokers in dealing with funds and securities of clients which specified several exclusive requirements. The aforesaid observation clearly fell under Clause D of the 1993 circular.

In terms of 1993 circular, the stockbroker is mandated not only to keep separate accounts for clients' and own dealings but also not to withdraw money from clients' account except in the situations permitted thereunder. The 1993 circular does not permit using excess funds of one client to meet the liability of another client.

In order to determine whether the Noticee had utilized clients' funds for purposes other than those permitted as stipulated in 1993 circular, the principle specified in the 2016 circular had been applied such that the total available funds i.e. day end balance in all clients bank accounts (A), cash and cash equivalents with the stockbroker and with the exchange/clearing corporation/clearing member (B), should always be equal to or greater than clients' funds as per ledger balance (C) and if [(A+B)-C = G] is negative, then it indicates that the credit balance clients' funds have been misused by the stockbroker for its own purposes or for settlement obligations of debit balance clients.

It was noted that the value of "G" was negative for all 39 sample dates, which was indicative of the fact that funds of the credit balance clients were not fully available for them for the sample dates and had either been utilized for debit balance clients and/or for brokers' own purpose for the sample dates, which was not permitted in terms of SEBI circular dated 18 November 1993. Moreover, the amount of misutilization ranged from Rs 7.3 crore to Rs 28.9 crore.

Also, the Noticee had failed to segregate clients' funds inter-se and/or between clients' funds and its own funds and had also misutilized funds of the clients. Therefore, Noticee was in violation of the provisions of section 23D of the SCRA r/w Clause 1 of Annexure of SEBI circular dated 18 November 1993 and Clause 3 of Annexure of SEBI circular dated 26 September 2016.

With respect to the alleged violation of incorrect reporting on the aggregate value of collateral deposited with clearing corporations and/or clearing member under enhanced supervision to the stock exchanges, Noticee while accepting the lapse had stated that they had subsequently improvised the process (maker-checker system) to ensure that such errors would not recur in future and reporting was done based on actual calculations.

Further, the Noticee had also submitted that they had informed all figures for enhanced supervision reporting to the Exchanges correctly. It was noted that the said incorrect reporting was admitted by the Noticee and the same was rectified after the inspection team found the discrepancies. Therefore, Noticee was in violation of provisions of Clause 3.2 of Annexure of SEBI Circular dated 26 September 2016.