Sebi slaps Rs 30-lakh penalty on Anand Rathi

Penalty for transferring of client money towards payment to commodity broking wing

The Securities and Exchange Board of India (Sebi) announced a Rs 30 lakh fine on a leading financial services entity, Anand Rathi (AR), for breaching the stock broker regulations. Sebi said AR had repeatedly withdrawn funds from a designated client bank account to make payments not to a client but to its own group company, the commodities brokerage wing. In doing so, it had failed to exercise due skill and care in conduct of business, breaching the statutory requirements under the Sebi Act.

The order said Sebi had examined the period from April 2012 to January 2014, when there were 21,198 instances amounting to Rs 220 crore of transfer of funds between the notice client ‘s account and Anand Rathi Commodities. Of these, there were a total of 11,220 instances worth Rs 119 crore of payments made from the noticee's bank account to AR Commodities. In 9,973 instances, amounting to Rs 101 crore, funds were received in the client’s bank account from the commodities wing. As an explanation, the brokerage stated these funds were transferred as the specific client in the securities market was also a client with AR Commodities and the transfers were made with the client’s consent. They had, since, completely stopped the practice.

However, Sebi noted its regulations do not permit this. “(The relevant) Circular does not permit moneys to be withdrawn from the client's account for or towards payment of debt due to the group company of the broker from the client, or, money in respect of which there is liability of client to the group company of the broker. The debt/ liability of the client towards the group company of the client cannot become the debt/liability of the notice with the client,” said Sebi's adjudicating officer in the order.

Sebi also noted that the erstwhile Forward Markets Commission, in a circular dated December 16, 2011, prohibited commodities' brokers from adjustment/transfer of funds between a securities exchange and a commodities exchange, even with a client's authorisation.

“Further in 2013, there was risk posed on account of interconnectedness, the trigger being the default occurring in commodities market,” stated the Sebi order.

The market watchdog in the order maintained that if argument put forward that the said transfers are executed with client's consent is accepted, it will convey a wrong message to the market participants.