'SEBI can't afford to be reactive and wait for a default to happen to take action', says order in IIFL Securities matter

New Delhi, June 19 (IANS) Markets regulator SEBI has prohibited IIFL Securities from taking up or onboarding any new client for a period of two years in respect of its business as a stock broker.

An order by SEBI whole time member S.K. Mohanty said, "While the noticee 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. 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."

While action in the matter of IIFL Securities Limited is necessary to be taken in the light of gravity of violations committed by it, a direction for the cancellation of certificate would be too disproportionate a punishment for not only the noticee itself, but also for its clients, both retail and institutional, as well as act antagonistic to the development of the securities market as a whole, the order said.

It added that the facts of the present matter clearly show that IIFL had acted in complete disregard of the legitimate interests of its credit balance clients and has not only benefitted itself, but also provided benefits to its debit balance clients at the cost of its credit balance clients by using funds of credit balance clients to settle its own proprietary trades as well as the trades of its debit balance clients to the tune of hundreds of crores of rupees.

Such usage of credit clients' funds for its proprietary trades as well as trades of its debit balance clients smacks of glaring indulgence in fraudulent misappropriation of such credit clients' funds, by which, IIFL has made a mockery of its fiduciary duty towards its clients as a market intermediary.

In the light of all the facts narrated in the present order, lack of integrity, promptitude and fairness in the acts of IIFL are self-evident and writ large from the very acts of IIFL as have been elucidated elaborately, the SEBI order said.

Therefore, while the past acts of the noticee had not been in tune with the established prudent market practices or with the regulatory instructions and the noticee has not conducted its affairs as a genuine market intermediary as unearthed during the repeated inspections conducted by SEBI, it has however now demonstrated its attempts to atone itself by correcting its wrongdoings and to suggest that the said violations have not continued as of now, the order said.

The SEBI order also said that the 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 noticee would have been far graver as compared to the violations committed by some small level brokers since any default on the part of the noticee would have affected the interest of large number of clients - both retail and institutional, leading to a certain likelihood of a drastic fall in trust, in the functioning of the securities market that SEBI has been trying to build over the last three decades.

"Any such erosion of trust in capital market would dissipate decades of efforts of Government of India and SEBI to create a safe, reliable and credible capital market in India and would possibly inflict a huge dent on Indian economy as well," the SEBI order said.

SEBI said the noticee 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.

The noticee firstly didn't assign its accounts appropriate nomenclature wherein it was keeping clients' monies so as to clearly label them as 'client accounts'.

Additionally, 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 the SEBI 1993 Circular by the noticee at least during the period from April 1, 2011 to January 31, 2017, the SEBI order said.

(Sanjeev Sharma can be reached at [email protected])