2018 (5) TMI 2151 - Board - SEBI

Violation under SEBI Act - Ex parte - ad- interim order - not settling the accounts of inactive clients - Mis-utilization of client securities - inspection carried out by SEBI revealed that there is Non-settlement of funds of inactive clients, Improper use/Mis-utilisation of client funds - funds of the clients, having credit balance with the Broker, were utilized for allowing exposure to the clients having debit balance or were used by F6 for its own purposes - difference between the credit balance in the clients ledger as submitted by F6 and the sum of balances lying in the Client Bank accounts and the cash collateral lying with exchanges as on the sample dates - HELD THAT - As there were unreasonably huge fund transfers between F6 and FCPL during the inspection period. A person acting as a securities market intermediary is expected to protect the interest of investors in the securities market in which he operates. Such a person is required to maintain high standards of integrity, promptitude and fairness in the conduct of his business dealings, and not be motivated purely by prospects of financial gain. As a regulator of the capital markets, SEBI has the duty to safeguard the interest of investors and protect the integrity of the securities market. Since the conduct of F6, FCPL and their directors is not in the interest of investors in the securities market, necessary action has to be taken against them immediately, else it may lead to loss of investors trust in the securities market. We are convinced that this is a case where effective and expeditious action is required to be taken to prevent any further harm to investors. Pending detailed inquiry, in view of the liabilities of F6 and FCPL and transfer of clients funds / securities between F6 and FCPL it is essential to take urgent steps to prevent F6, FCPL and its present / past directors not to alienate any assets, whether movable or immovable, or any interest or investment or charge in any of such assets, so that the final remedies, if any, do not become infructuous. Further, in order to maintain the status quo, pending detailed inquiry, it is appropriate that the holdings of the bank accounts of F6 and FCPL are also required to be frozen. For non-compliances, movement of funds, misconduct and failure to repay the investors, pending detailed inquiry, it is also appropriate that the holdings of the bank accounts of Mr. Pankaj Goel and Ms. Meenu Goel are also frozen in order to maintain the status quo. Thus F6 Finserve Private Limited, F6 Commodities Private Limited, Mr. Pankaj Goel, Mr. Parveen Sharma, Mr. Meenu Goel, Mr. Sanjay Anand, Ms. Kavita Anand, Ms. Asha Sharma, Mr. Deepak Goel and Ms. Ruchika Goel are restrained from accessing the securities market and are further prohibited from buying, selling or otherwise dealing in securities, either directly or indirectly, or being associated with the securities market in any manner whatsoever, till further directions. The aforesaid entities and persons shall cease and desist from undertaking any activity in the securities market, directly or indirectly, in any manner whatsoever till further directions and are directed to provide a full inventory of all their assets, whether movable or immovable, or any interest or investment or charge in any of such assets, including details of all their bank accounts, demat accounts and mutual fund investments immediately but not later than 5 working days from the date of receipt of these directions. Also directed not to dispose of or alienate any assets, whether movable or immovable, or any interest or investment or charge in any of such assets excluding money lying in bank accounts except with the prior permission of SEBI.

Summary

Issues Involved:
1. Mis-utilization of client securities.
2. Non-availability of clients’ securities.
3. Unexplained use of funds raised by pledging client securities.
4. Actual settlement of client fund and securities not done.
5. False reporting of margin collected from clients.
6. Improper use of client securities.
7. Failure to furnish information to the inspection team.
8. Violation of SEBI regulations and circulars.
9. Connection between F6 and FCPL and fund transfers.
10. Pending investor complaints and liabilities.

Issue-wise Detailed Analysis:

1. Mis-utilization of client securities:
The broker, F6 Finserve Private Limited (F6), was found to have utilized securities belonging to other clients to meet pay-in obligations of a specific client, K. K. Advisor Pvt. Ltd., on 100 instances amounting to Rs. 5.86 Cr. Additionally, F6 met proprietary pay-in obligations from client securities amounting to Rs. 1,77,057.35.

2. Non-availability of clients’ securities:
It was observed that there was a significant shortfall in client securities. For instance, as on January 22, 2018, out of clients’ securities worth Rs. 51.57 crores recorded in the Register of Securities (ROS), only Rs. 20.59 crores were available, indicating a shortfall of Rs. 30.98 crores. Some of these securities were pledged with financial institutions without proper client details.

3. Unexplained use of funds raised by pledging client securities:
F6 availed overdraft facilities by pledging client securities with IL&FS, Edelweiss, and Canara Bank. The total value of shares pledged was Rs. 22.53 Cr. The overdraft amount often exceeded the obligation of the relevant clients, raising concerns about the unexplained use of these funds.

4. Actual settlement of client fund and securities not done:
F6 failed to settle accounts for numerous clients. For instance, as on September 30, 2016, settlements for 121 clients with credit balances of funds and securities inactive for more than three months were not done. Similar issues were noted in subsequent inspections.

5. False reporting of margin collected from clients:
F6 incorrectly reported margin collected from clients trading in the Future & Option segment on multiple instances. This misreporting violated SEBI regulations and circulars.

6. Improper use of client securities:
The broker used client securities to meet obligations in proprietary accounts and those of the director, Pankaj Goel. Securities belonging to clients were sold without proper possession, leading to negative balances in the ROS.

7. Failure to furnish information to the inspection team:
F6 failed to provide complete information/data to the inspection team despite multiple reminders and meetings. This non-cooperation hindered the inspection process.

8. Violation of SEBI regulations and circulars:
F6 violated several SEBI regulations and circulars, including:
- SEBI Circular No. MIRSD/SE/Cir-19/2009 by not settling accounts of inactive clients.
- SEBI Circular No. SMD/SED/CIR/93/23321 by transferring client funds to the broker’s overdraft account and misusing client securities.
- SEBI Circular MRD/DoP/SE/Cir-11/2008 by mis-utilizing funds of credit balance clients.

9. Connection between F6 and FCPL and fund transfers:
F6 and FCPL (F6 Commodities Private Limited) were found to be connected through common directors and significant fund transfers. The net transfer from FCPL to F6 during the period April 01, 2016 - March 31, 2018 was approximately Rs. 5.51 Cr. Despite FCPL not being an active client of F6, there were substantial fund transfers between the two entities.

10. Pending investor complaints and liabilities:
As on April 17, 2018, F6 had 288 pending complaints with a claim value of Rs. 41.92 Cr. Similarly, FCPL had 61 investor complaints with a claim value of Rs. 35.95 lakh. The broker’s failure to resolve these complaints further highlighted its non-compliance and mismanagement.

Conclusion:
In light of the above findings, SEBI issued several directions to restrain F6, FCPL, and their directors from accessing the securities market and to freeze their assets to protect investor interests. The order emphasized the need for urgent action to prevent further harm to investors and maintain market integrity.