Indias stock market regulator has issued a show-cause notice to one of the countrys largest listed broking firms, India Infoline Ltd (IIFL), for alleged violation of certain norms.
The notice issued by the Securities and Exchange Board of India (Sebi) after an enquiry, asks IIFL why a higher penalty, including suspension of certificate of registration for a specified period or even cancellation of certificate of registration, should not be imposed on it.
Ahead of this, the investigating officer of Sebi had issued a warning to the firm.
A show-cause notice is not an indictment but requires the firm named to present its side of the story within a stipulated timeframe, normally three weeks.
According to the Sebi notice, the enquiry report has established alleged violations, including non-delivery of contract notes to clients, unauthorized trades, non-maintenance of records of receipts at offices, among others.
Other violations, according to the notice, include not displaying order details in the contract note to clients and also delaying inspection data or providing incomplete data to Sebis inspection team.
An email sent to Sebi seeking comments did not elicit any response.
The enquiry officer had noted the corrective measures taken by us on all the referred observations and concluded by recommending issue of a warning, IIFL said in an e-mailed response.
The brokerage said the show- cause notice was related to a regular Sebi inspection on its broking operations which was conducted during April 2007 to June 2009.
...discrepancies in trading account opening forms are of serious in nature. As per the enquiry report you have put system in place to ensure proper compliance of know your client (KYC) norms from April 2008. However, the stock brokers are required to comply with the KYC requirements with effect from August 26, 2004, as per Sebi circular, the notice said.
IIFL said it is seeking a consent settlement and is in the process of submitting detailed replies to Sebi along with submission of corrective actions and strengthening of systems and processes implemented by it so far.
with a view to avoid long proceedings with Sebi and to conclude the matter amicably without admission of guilt, preferred consent process in this matter before Sebi, the brokerage said.
The consent procedure is a kind of out-of-court settlement between the regulator and a company without any admission or denial of guilt. It involves the company paying a fee, and in some cases, agreeing to restrict some business activities.
The system has invited criticism from some quarters as retail investors interests are involved in many cases where the magnitude of offence often dwarfs the terms of the consent settlement.
The process should be made more transparent because though the consent terms need to be cleared by three committees in Sebi internally, it is an opaque process. Further, some guidelines may be laid down that prescribe minimum and maximum penalties in each cases, said Joby Mathew, a securities market lawyer.
Some of the consent orders passed by Sebi in recent times that involved retail investor interests include the matters of Reliance Securities Ltd and Edelweiss Capital Ltd.
In Reliance Securities case, Sebi found irregularities such as the brokerage charging excess securities transaction tax to clients and lack of information of various charges at the time of registering clients, among others.
Sebi settled the case through a fee of Rs. 25 lakh and another Rs. 1 crore to be spent by the company on investor education and awareness. The brokerage also agreed to stop registering new clients for 45 days from the date of issuing the consent order.
In the Edelweiss case, Sebi found that the entity had not sought independent professional advice in verifying records in some instances, and did not provide correct information in the draft red herring prospectus of clients, among others. The regulator settled the case for Rs. 15 lakh.
But for the consent system, there would be endless appeals. However, it is desirable that the system has more disclosures, said Sandeep Parekh, founder, Finsec Law Advisors. He was also a part of the Sebi team which drafted consent order mechanism.
Sebi is in the process of reviewing the procedures of consent orders by making it transparent and uniform for all cases.