The penalty, announced through an inquiry order, comes after SEBI found multiple violations of regulatory provisions between April 1, 2021 and October 31, 2022 after a joint inspection conducted by stock exchanges NSE, BSE and MCX.
The action stems from a comprehensive review of the firm’s operations conducted from November 2 to November 8, 2022. During this inspection period, SEBI identified a series of lapses including misappropriation of client funds, delayed settlement of client accounts, misreporting of margins and cases of unauthorized paper passing to clients.
One of the key findings in the inspection was misappropriation of client funds. Sebi observed that on three separate dates on July 12, 13 and 15, 2021, the firm’s “G-Value”, a regulatory parameter used to monitor the adequacy of client funds, was negative, amounting to Rs. 2.70 crore indicating a shortfall.
This indicates that funds available in client bank accounts and with clearing corporations were insufficient to cover the total credit balance of the clients. Sebi said this amounts to misappropriation of client funds, which is in violation of regulatory norms.
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The brokerage, in its defense, attributed the incidents to temporary disruptions during the COVID-19 period, citing operational difficulties and staff reductions. He argued that a negative g-value is not conclusive evidence of abuse but merely a warning mechanism. However, SEBI concluded that the firm had failed to provide satisfactory explanation or documentary evidence to rebut the findings.
Further, SEBI identified patterns of delayed settlement of client accounts. The inspection found that funds of 1,283 non-traded clients, 677 monthly-settlement clients and three traded clients were not settled within the stipulated time frame.
While the firm claimed that the delay was due to software errors and that the accounts were eventually settled, Sebi noted that no evidence of such errors was presented and the amount of unsettled funds was substantial.
The order also cited incorrect reporting and short collection of margins. Specific cases of mismatched end-of-day (EOD) and peak margin were highlighted, in one instance Rs. 55.46 lakhs including short collections.
SEBI found a discrepancy between the margin reported to the stock exchange and the actual margin collected from clients, which the broker attributed to clerical errors and time difference in check clearance. These explanations were not accepted by the regulator in the absence of supporting evidence.
Further, SEBI noted that the firm had passed on the penalty charged by clearing corporations for margin shortfalls to clients in violation of applicable circulars. Although the firm argued that the penalty was related to post-trade adjustments such as MTM losses or period margin increases, Sebi maintained that such actions are not permissible, especially after the regulatory changes that come into effect from October 2021.
In total, SEBI listed more than a dozen regulatory violations in the order, including misappropriation of client funds, procedural lapses, documentation errors and false margin reporting. While Prabhudas Leeladhar argued that the issues were minor, technical and did not cause harm to investors, Sebi said the nature of the violations warranted enforcement action under the arbitration rules.
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The firm was served with a show cause notice and given multiple opportunities to present its case including personal hearing and written submissions. After reviewing all the evidence and responses, SEBI concluded that the firm had failed to comply with several key regulatory requirements and accordingly imposed a 7-day ban.
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