SAT sets aside SEBI order barring IIFL Securities from onboarding new clients

The Securities Appellate Tribunal (SAT) has set aside an order passed by the capital markets regulator SEBI that restrained broking company IIFL Securities Ltd from onboarding new clients for two years. The IIFL Securities shares closed 2.20% up at ₹118.25 on the NSE today.

The appellate tribunal has also reduced the financial penalty imposed on the company from ₹1 crore to ₹20 lakh.  

"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 to show that there was a misuse of client funds which, in our opinion, is patently erroneous," the order passed by Justice Tarun Agarwala, presiding officer, SAT, says.

SAT also says there is no failure on the part of the appellant to segregate the monies of the client. It is not that these monies have been misused for their purposes, and so no penalty under Section 23D of the SCRA could be imposed, says the order.

However, SAT affirmed the SEBI findings submitted on “nomenclature of the client accounts”, which it said were "violative" of the 1993 circular. All other findings have been set aside, it added. 

"The appellant has failed to change the nomenclature of the bank accounts of the client as required to be done under the 1993 circular," the order says, adding that it was a "technical breach" not the "misuse of the client funds".

The appellate tribunal says that considering that it is only a "technical breach", in the given circumstances for the two show cause notices, a "penalty of Rs 20 lakh" in total would be sufficient.

Any amount deposited in excess in terms of our order will be refunded to the company in the next four weeks.

SEBI this year in June had barred the broking firm from taking new clients for two years after conducting multiple inspections of the books of account of IIFL for the period April 2011 to January 2017. The SEBI’s order said that IIFL "flagrantly violated" the provisions of the SEBI 1993 circular.

SEBI had said the company firstly didn’t assign its accounts appropriate nomenclature wherein it was keeping clients’ monies to clearly label them as ‘client accounts’. Additionally, it was mixing clients’ funds with its funds before using those mixed funds for its proprietary usage, the order stated. 

"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 trades. This demonstrates an utter disregard to the provisions of SEBI 1993 Circular by the Noticee at least during the period of April 01, 2011, to January 31, 2017." 

Five days later, SAT had stayed the SEBI order against the company from taking new clients for two years until further orders, thereby providing interim relief to the brokerage firm.