SEBI Fines IIFL Securities ₹11 Lakh for Regulatory Violations

August 24, 2024

The Securities and Exchange Board of India (SEBI) has imposed an ₹11 lakh fine on IIFL Securities Limited for violating various regulatory guidelines under the Securities Contracts (Regulation) Rules and related SEBI circulars.

SEBI discovered multiple compliance failures at IIFL Securities. The regulator found that the broker had engaged in unauthorized fund-based transactions, including borrowing funds from clients, which is not allowed under current regulations. Specifically, IIFL Securities had transferred ₹17.43 crore to 136 clients under these agreements at interest rates of 4-5 percent per annum. Instead of creating fixed deposits as requested by clients, the funds were used for trading and margin requirements.

The SEBI order outlined several infractions, including violations related to margin trading and client fund management. These included incorrect reporting of client ledger balances, exceeding allowable exposure limits for margin trading, and mishandling margin requirements. The broker was also found to be improperly passing penalties related to short reporting to clients, a practice banned under SEBI guidelines. These breaches were primarily linked to Rule 8(3)(f) of the Securities Contracts (Regulation) Rules, 1957, which prohibits brokers from engaging in fund-based activities outside their authorized services.

Additional violations were identified under the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992, specifically Regulation 9(f), which mandates adherence to a Code of Conduct and due diligence.

SEBI also found that IIFL Securities had delays in settling client funds and securities, with 29 out of 96 reviewed samples showing delays exceeding 90 days and incorrect retention statements issued. These issues violated SEBI guidelines outlined in circulars dated December 3, 2009, September 26, 2016, and June 16, 2021.

The order noted deficiencies in reconciling client securities between demat accounts and back office records. Failure to reconcile 1,835 shares valued at ₹11.69 lakh breached SEBI’s April 17, 2008, circular.

IIFL Securities was also cited for not closing certain client collateral accounts by the required deadlines, violating SEBI circulars dated February 25, 2020, and July 29, 2020. The broker was found to have incorrectly transferred securities to the Client Unpaid Securities Accounts of clients with a credit balance in their funds ledger, against SEBI guidelines from June 20, 2019.

The violations included non-compliance with various SEBI circulars, such as SEBI/MIRSD/SE/Cir-19/2009 dated December 3, 2009, which outlines settlement requirements for client funds and securities, SEBI/HO/MIRSD/MIRSD2/CIR/P/2016/95 dated September 26, 2016, on enhanced supervision, SEBI/HO/MIRSD/DOP/P/CIR/2021/577 dated June 16, 2021, regarding client fund and security management, SEBI Circular MRD/DoP/SE/Cir-11/2008 dated April 17, 2008, on accurate stock reconciliation, and SEBI/HO/MIRSD/DOP/CIR/P/2020/28 dated February 25, 2020, and SEBI/HO/MIRSD/DOP/CIR/P/2020/143 dated July 29, 2020, on client collateral account management.

SEBI emphasized that IIFL Securities was expected to fully comply with all SEBI regulations and stock exchange guidelines. The identified lapses were considered serious breaches that compromised the integrity and transparency of securities trading. SEBI underlined that these regulations aim to prevent misconduct and ensure ethical behavior in the securities market, with IIFL Securities expected to maintain high standards of professionalism and statutory compliance.

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