Broking firms wary of Sebi’s harsh actions

New Delhi India’s broking industry is shaken after the recent order by the Securities Exchange Board of India (Sebi) against IIFL Securities banning the company from onboarding new clients for two years.

Though, Securities Appellate Tribunal (SAT) has suspended the order, the harsh order by SEBI has created panic among industry players, who fear that orders of this magnitude is coming for them that will d

estroy the industry. A promoter of a large broking firm said: “The SEBI order against IIFL seems to be a clear cut instance of punishment grossly exceeding the violation and retrospective in nature.”

The SEBI order is based on their inspection of IIFL Securities for a period from 2011 to 2014 when they found IIFL Securities didn’t assign its accounts appropriate nomenclature wherein it was keeping clients’ money so as to clearly label them as ‘client accounts’. Additionally, it was mixing clients’ funds with its own fund before using those mixed funds for its own proprietary usage. The SEBI order of banning IIFL Securities from onboarding new clients for two years came even after the regulator had slapped Rs2 crore fine on the broking firm for the same observations and allegations. Three CEOs of large broking firms agreed that this a harsh order and are worried in case SEBI issues further orders against them as well for which they have already been fined. One of the CEOs said: “The industry will collapse with the regulator goes for such black and white judgements. There are no instances of default of malpractice by brokers including IIFL Securities. This kind of banning business will be deadly for every broker.” Data shows, for similar violations like IIFL Securities or even graver violations, the market regulator had let off half a dozen brokers with fine ranging from Rs1 lakh to Rs35.32 lakhs. SEBI had imposed a penalty of Rs1 lakh on Anand Rathi Share and Stock Brokers Ltd in November 2018; a fine of Rs15 lakhs on Systematix Shares & Stocks (I) Ltd in December 2017; a fine of Rs17 lakh on Motilal Oswal Financial Services in February 2020; a fine of Rs30 lakh on Nirmal Bang Securities in February 2020; and a fine of Rs35 lakh on Edelweiss Securities in settlement order. In a more severe case in 2020, SEBI had imposed just a fine of Rs12 lakh on Ganganagar Commodities. In that case, SEBI had observed usage of funds of credit balance clients for settling some of the trades of debit balance clients. Three CEOs at large broking firms said, this practice was prevalent in those days.

“It was not done with any ill intent to siphon off clients’ money but was for operational comfort and it was not violating any SEBI norms specifically at that time. All brokers rectified this practice after SEBI issued a clear enhanced circular in 2017.”