SAT sets aside market regulator Sebi's order against IIFL Securities

Sebi alleged that IIFL Securities failed to segregate clients' funds and mixed its own funds with it

The Securities Appellate Tribunal (SAT) on Thursday set aside the order by the Securities and Exchange Board of India (Sebi) restricting IIFL Securities from taking new clients for two years.

The tribunal has also reduced the penalty imposed on the stockbroker to Rs 20 lakh from Rs 1 crore.

The market regulator had alleged that IIFL Securities had failed to segregate client funds and mixed its own funds with client funds, and misused credit balances in clients’ funds for the benefit of clients having a debit balance. Sebi had alleged that IIFL Securities used pool accounts.

Sebi had conducted nearly half a dozen inspections between April 2011 and January 2017.

“In our view, the approach adopted by the WTM (whole-time member) is erroneous. The 1993 circular required the appellant to keep separate accounts, namely, client accounts and own account separately, which the appellant had done,” said the order.

The tribunal noted that the 1993 circular did not prohibit making a pool account and thus whether the amount goes directly to the settlement account or passes through the pool account becomes irrelevant.

“The pool account was created for convenience and does not lead to any conclusion that the mixing of client’s money with the broker’s money amounts to misuse of clients’ money,” the order noted.

The tribunal further noted that the said procedure was stopped in 2014. The tribunal added that the conclusion of ‘misuse of client funds’ was based on the erroneous application of a 2016 circular, which came into effect in 2017, and that it can’t be applied on ‘retrospective operation’.

While Sebi contended that the 2016 circular was in furtherance of the 1993 circular, SAT said, “If the 2016 circular was only a reiteration of the 1993 circular, then there was no need for the respondent (Sebi) to issue 17 clarificatory circulars.”

However, the tribunal did affirm a violation of the 1993 circular regarding the nomenclature of ‘client’ accounts as the broker did not add the word ‘client’ before several accounts. For this ‘technical breach,’ the court imposed a fine of Rs 20 lakh.