Why did IIFL Securities’ shares tank over 18 per cent?

Why did SEBI take action against IIFL Securities?

Sebi conducted a thematic inspection of the books of accounts of IIFL from January 30 to February 03, 2014, during which the records and the processes of IIFL from April 01, 2011, to December 31, 2013, were inspected. The Sebi action is for mixing clients’ funds with proprietary funds, for using credit-balance client accounts to settle obligations of debit-balance client accounts, and for using credit-balance client accounts to settle proprietary-trade obligations.

The order stated that the inspection revealed that IIFL had not  assigned names to 26 of its 45 clients’ accounts as ‘client accounts’ in the bank record, despite the issuance of a warning by BSE.

On finding evidence of mixing client funds and using client funds for settling obligations of proprietary accounts, the market regulator launched supplementary inspections of records between April 1, 2011, and June 30, 2014. In the third supplementary inspection, which took data for 695 trading days, “IIFL was found to have misused the credit clients’ funds for the settlement obligation of debit balance clients on 687 days which was 98.85 per cent of the total aforesaid sample days”, stated the order.

“At the same time, on 29 days, IIFL was also found to have misused the funds of credit clients for the settlement obligation of proprietary trades,” it said.

What did SEBI say in its order?

“I hereby prohibit IIFL Securities Ltd from taking up/onboarding any new client for a period of two (2) years in respect of its business as a stockbroker,” said SK Mohanty, Whole Time Member, SEBI, in his order.

“While the past acts of the IIFL Securities had not been in tune with the established prudent market practices or with the regulatory instructions and the IIFL Securities has not conducted its affairs as a genuine market intermediary as unearthed during the repeated inspections conducted by SEBI, which have been already highlighted above at length, it has however now demonstrated its attempts to atone itself by correcting its wrongdoings and to suggest that the said violations have not continued as of now,” Sebi in its order said.

The order, however, added while action against IIFL Securities was necessary to be taken in the light of the gravity of violations committed by it, a direction for the cancellation of the certificate would be too disproportionate punishment for not only the brokerage firm but also to its clients, both retail and institutional.

What might IIFL Securities do now?

After the SEBI’s order, IIFL Securities informed exchanges that it is in the process of preferring an appeal against the order before the Securities Appellate Tribunal (SAT).

The company said it has always met all obligations towards exchanges and clients on time. It has always followed a compliance-first approach and carried out business in full compliance in letter and spirit.

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The company clarified that SEBI’s order does not affect its existing business with the current clients.