SEBI's 7-Day Ban on Prabhudas Lilladher: What Client Fund Violations Reveal

The action came after SEBI found that the firm violated several rules related to client funds, margins, reporting and brokerage.

The order, issued by SEBI’s Chief General Manager N. Murugan, said the broker cannot take on any new contracts or launch any new schemes during the seven-day restriction period.

SEBI’s action follows a joint inspection carried out by SEBI, NSE, BSE and MCX for the period between April 1, 2021 and October 31, 2022.

During the investigation, the regulator found that the firm had misused client money, failed to settle client accounts on time, incorrectly reported margins and client balances, and charged brokerage beyond the permitted limits.

SEBI rejected the company’s argument that these issues were minor or caused by software or clerical errors. It said the violations affected core rules meant to protect client money.

On the issue of fund misuse, SEBI found that on three days in July 2021, the broker had a shortfall of about Rs 2.70 crore between the money it was supposed to hold for clients and the actual balance available.

This showed that client funds were used improperly. The firm’s explanation that the issue was due to COVID-related disruptions and was small compared to the overall business was not accepted.

The order also highlighted delays in returning idle client funds. Balances of 1,283 non-traded clients on a quarterly basis, 677 such accounts on a monthly basis and three traded client accounts were not settled within the required timelines.

SEBI noted that settlements must be made on time regardless of whether clients complain or the broker later fixes the lapse.

The inspection also found incorrect reporting of end-of-day and peak margins, including a short-collection of peak margins of around Rs 55.46 lakh in one instance.

There were also issues of misreported client funds and wrong ledger balances submitted to the exchanges.

SEBI further found that penalties imposed by clearing corporations for short-collection of margins were passed on to clients and often not refunded, despite clear directions from the exchanges. This practice is not allowed under the rules.

- IANS