The Securities Appellate Tribunal (SAT) on Thursday set aside an order by market regulator SEBI restraining IIFL Securities from taking new clients for two years. It also slashed the penalty imposed on the brokerage to ₹20 lakh from ₹1 crore, ruling it to be a technical breach.

SEBI had carried out six inspections between April 1, 2011 and January 31, 2017, followed by two separate enquiry proceedings. It issued two separate show-cause notices last year, alleging that 26 out of the 45 client bank accounts during inspection were not titled as “client account”. The show-cause notice also alleged that funds were regularly being transferred from client bank accounts to the pool or control accounts of the appellant which were managed and controlled by appellant as its own bank account.

“These inspections found no misutilisation of the client funds. Admittedly, there has been no misuse of client funds and by wrongly considering the non-funded portion of the bank guarantee as per the 2016 circular, an attempt has been made out to show that there was a misuse of client funds which, in our opinion, is patently erroneous,” the SAT order said.

The Tribunal concluded that there was no misuse of clients funds or failure on the part of the brokerage to segregate monies of the client or misuse of client funds. “No penalty under Section 23D of the SCRA could be imposed. However, we find that the appellant has failed to change the nomenclature of the bank accounts of the client as required to be done under the 1993 circular,” SAT observed, calling it a technical breach deserving a penalty of ₹20 lakh.

SAT also pulled up the regulator for initiating two separate proceedings for the same cause of action based on inspections made between 2011 and 2017.

SEBI passed an order in June this year restraining the brokerage from onboarding new clients for two years.

Related Topics