SAT Sets Aside Sebi Order Prohibiting IIFL Securities From Taking New Clients For 2 Yrs

The Securities Appellate Tribunal (SAT) on Thursday set aside the market regulator Sebi's order prohibiting IIFL Securities from onboarding new clients for two years, and slashed the fine levied on the brokerage house to Rs 20 lakh from Rs 1 crore.

The order came after IIFL Securities, earlier known as India Infoline Ltd., filed an appeal against the order passed by the Securities and Exchange Board of India (Sebi) in June.

The capital markets regulator, in June, prohibited IIFL Securities from taking up new clients for two years for alleged mis-utilisation of client funds.

Setting aside Sebi's order, SAT Presiding Officer Justice Tarun Agarwala and technical member Meera Swarup said, "There has been no misuse of client funds and by wrongly considering the non-funded portion of the bank guarantee as per the 2016 circular, an attempt has been made out to show that there was a misuse of client funds which, in our opinion, is patently erroneous".

Further, it said that there was no failure on the part of the appellant (IIFL Securities) to segregate the money of the client. It is not that these monies have been misused for their purposes, and so no penalty under the Securities Contracts (Regulation) Act (SCRA) could be imposed, the order said.

However, the appellate tribunal noted that IIFL Securities has failed to change the nomenclature of the bank accounts of the client as required to be done under the 1993 circular.

It, further, said it was a "technical breach" and there was no misuse of the client funds by the appellant.

Considering that it is only a "technical breach", the tribunal said a penalty of Rs 20 lakh in total would be sufficient.

Sebi, in the order passed in June, stated that IIFL failed to segregate its funds from clients' funds, misused the funds of its credit balance clients for settlement of its proprietary trades as well as the trades of its debit balance clients from April 2011 to June 2014, and the said violations were again noticed during March 2017 inspection for the period of FY2015-16 and 2016-17.

The order came after the Sebi conducted multiple inspections of the books of account of IIFL for the period April 2011 to January 2017.