The action stems from a comprehensive review of the company’s operations conducted from November 2 to 8, 2022. During this inspection period, Sebi identified a series of deficiencies, including cases of misuse of customer funds, delayed settlement of customer accounts, improper reporting of margins and unauthorized fines to customers.One of the key findings from the investigation was the misuse of customer funds. Sebi noted that on three separate dates – July 12, 13 and 15, 2021 – the company’s ‘G-value’, a regulatory parameter used to monitor the adequacy of customer funds, was negative, indicating a shortfall of Rs 2.70 crore.
This indicated that available funds in customers’ bank accounts and clearing houses were insufficient to cover customers’ total assets. Sebi felt that this constituted misuse of customer funds, a violation of regulatory norms.
In its defense, the brokerage attributed these cases to temporary disruptions during the COVID-19 period, citing operational issues and reduced staffing levels. It argued that a negative G value was not conclusive evidence of abuse, but merely a warning mechanism. However, Sebi concluded that the company had failed to provide a satisfactory explanation or documentary evidence to refute the findings. Further, Sebi identified cases of delayed settlement of customer accounts. The inspection found that the funds of 1,283 non-traded customers, 677 monthly settlement customers and three traded customers had not been settled within the prescribed timeframes. While the company claimed that these delays were due to software errors and that the accounts were eventually settled, Sebi noted that no evidence of such errors had been provided and the amount of unsettled funds was significant.
The order also cited improper reporting and short collection of margins. Specific cases of end-of-day (EOD) and peak margin mismatches were highlighted, including a short collection of Rs 55.46 lakh in one case.
Sebi found discrepancies between the margins reported to the exchange and the actual margins collected from customers, with the broker attributing the errors to clerical errors and timing discrepancies in check cashing. These statements were not accepted by the regulator due to a lack of supporting evidence.
Moreover, Sebi noted that the company had imposed fines on customers who violated applicable circulars imposed by clearing companies for margin shortfalls. While the company claimed that the fines were related to post-trade adjustments such as MTM losses or tension margin increases, Sebi maintained that such actions were not permissible, especially after the regulatory changes that came into effect in October 2021.
In total, Sebi listed more than a dozen regulatory violations in the order, including misuse of customer funds, procedural errors, documentation errors and improper margin reporting. While Prabhudas Lilladher argued that the issues were minor and technical and had not caused any harm to investors, Sebi stated that the nature of the violations warranted enforcement action under the Intermediaries Regulations.
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The company was issued a show cause notice and given multiple opportunities to present its case, including an in-person hearing and written submissions. After considering all the evidence and responses, SEBI concluded that the company had failed to comply with some basic regulatory requirements and imposed a seven-day bar accordingly.
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