MUMBAI: Market regulator Securities and Exchange Board (Sebi) has barred stock broker Prabhudas Lilladher from onboarding new clients for seven days from December 15, for alleged violation of its rules relating to client funds, margins, reporting and brokerage.
“The noticee is prohibited from taking up any new assignments or contracts or launching a new scheme for a period of seven days starting from December 15,” the Sebi said in an order issued late Friday.
The ban follows a joint inspection by Sebi, NSE, BSE and MCX covering a period from April 1, 2021 to October 31, 2022. Sebi investigation alleged that the broking firm misused client funds, failed to timely settle client accounts, incorrectly reported margins and client balances, and charged excess brokerage in breach of regulatory caps.
The regulator has also rejected the firm’s contention that the lapses were merely technical or due to software and clerical errors, stressing that the violations struck at “core regulatory obligations” on segregation and protection of client assets. On the key charge of fund misuse, Sebi held that on three dates in July 2021 the brokerage had an aggregate shortfall of about Rs 2.70 crore between client bank balances plus cash-equivalent collateral and total client credit balances, establishing misutilisation of client money contrary to client protection rules.
The brokerage told Sebi that the negative balances arose from Covid-related disruptions, and were small relative to its overall business, was found to be unsubstantiated and legally irrelevant.
However, Sebi said; “...the shortfall identified in the client account necessarily represents a withdrawal of client funds. The noticee has not demonstrated that such withdrawal falls within any of the three permissible exceptions."
The Sebi order also noted delays in returning idle balances to clients. Funds of 1,283 non-traded clients on a quarterly basis, 677 instances of non‑traded accounts on a monthly basis and three traded client accounts were not settled within the mandated timelines, involving amounts running into several crores of rupees.
Sebi said non-settlement cannot be excused by rectification or absence of complaints, since the settlement regime is meant to curb potential misuse of idle client funds. Sebi’s inspection also found incorrect reporting of end-of-day and peak margins for several clients and a short-collection of peak margins of about Rs 55.46 lakh in one case, alongside misreporting of client funds and ledger balances uploaded to exchange systems.
Further violations included parking securities of fully-paid, credit-balance clients in a client unpaid securities account instead of transferring them to demat accounts, incorrect reporting of client exposure, excess brokerage and delays in KRA uploads. While taking note of subsequent corrections, refunds and the relatively small amounts in some breaches, Sebi concluded that the pattern of lapses warranted a temporary prohibition on new business as a supervisory and deterrent measure.