SAT sets aside Sebi order barring IIFL Securities from taking new clients, reduces penalty to ₹20 lakh

The Securities Appellate Tribunal on Thursday overturned a Securities and Exchange Board of India (Sebi) order restricting IIFL Securities from acquiring new clients. The tribunal also lowered the penalty from Sebi’s initial fine of ₹1 crore to ₹20 lakh.

“The direction of the whole-time member restraining the appellant (IIFL Securities) from taking new clients for a period of two years is set aside,” said a SAT bench led by Justice Tarun Agarwala in a 35-page order.

“The penalty imposed by the adjudicating officer is reduced to ₹20 lakh. Any amount deposited in excess, in terms of our order, shall be refunded to the appellant within four weeks from today.”

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The bench said there was “no misuse of the clients funds”, and since there was no failure on the part of the appellant to segregate funds of the client, or misuse funds of clients for its own purposes, no penalty could be imposed under Section 23D of the Securities Contracts (Regulation) Act (SCRA). Section 23D stipulates penalties for not segregating clients’ securities or funds.

In June, Sebi’s whole-time member S.K. Mohanty, in his final order, restrained IIFL Securities from onboarding new clients as a stockbroker for two years. According to the order, Sebi had conducted inspection of IIFL Securities’ books and processes pertaining to April 2011 to December 2013 to ascertain whether it was working in compliance with regulatory guidelines on segregation of client securities.

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The regulator had also said that it found the actions of IIFL were not in compliance with Sebi’s broker regulations. The regulator alleged that IIFL had failed to segregate its own funds from clients’ funds, and the company misused credit balances in clients’ funds.

Based on the findings, Sebi conducted an investigation. Mohanty observed that IIFL’s past actions didn’t align with established prudent market practices or regulatory instructions. Besides, during Sebi’s repeated inspections, it found that IIFL did not reflect genuine market intermediary practices, he added.

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Considering the gravity of violations, action against IIFL is necessary, he said, but cautioned against any disproportionate punishment as it could adversely affect not only IIFL but its diverse client base, comprising retail and institutional investors, besides overall development of the securities market.

Subsequently, Sebi’s adjudicating officer levied a fine of ₹1 crore on IIFL.

Aggrieved by the Sebi order, IIFL challenged it before the SAT, and sought interim relief in the matter. On 27 June, it had got some interim relief.

In March 2017, Sebi had conducted another probe to verify whether IIFL had complied with the regulations and circulars on the segregation of funds and securities of clients. Regarding this, the appellate tribunal on Thursday said that when several inspections were made between 2011 and 2017 on the same cause of action, and upon an alleged violation being found, the adjudicating officer should have initiated only one proceeding instead of two.