SEBI fines IIFL Securities for violation of norms related to the client funds

Brokerage businesses handle significant client money and hence are supposed to be managed with extreme discipline. Regulations are well laid out in that regard.

However, time and again we come across cases that raise doubt on this underlying presumption.

Today, SEBI passed an adjudication order against IIFL Securities Limited (IIFL) for some serious violations –

1. Failing to segregate it’s own funds from client funds;
2. Misusing credit balance of client funds for debit balance client funds; and
3. Not appropriately designating client bank accounts.

These are very concerning observations and challenge a common man’s belief in this kind of business.

Other key points in SEBI’s order –

• The order is the outcome of multiple inspections by SEBI of IIFL’s books for the period April 2011 to January 2017.
• IIFL had misused client funds in the range of Rs 0.59 crores to Rs 397.02 crores for settlement obligation of debit balance clients and in the range of Rs 0.26 crores to Rs. 73.28 crores for proprietary purposes.
• Interest on the funds misused amounted to Rs 34.87 crore.
• The defaults were found to be repetitive.

IIFL tried to defend the above by claiming it to be a general industry practice during those periods and the process followed to be in normal course. SEBI found no merit in the defence.

I fail to understand how this can be normal practice and if it was, everyone else doing the same should be held responsible as well.

Brokerages are supposed to run an extremely clean and efficient operation and not mix clients funds/ securities with it’s own or other clients. Allowing them to do so has significant systemic risks.

It’s also worth noting here that IIFL group is amongst the top wealth manager in the country and hence manages very large money.

What is the penalty imposed on IIFL?

Rs One crore.

Isn’t it too low?

It is but that’s the maximum as per the current law for the observed violations.