The Adjudicating Officer, SEBI passed an order on February 23, 2017 in respect of M/s Pune E-Stock Broking Pvt. Ltd. (PESB), a trading member of BSE Ltd., National Stock Exchange of India Ltd. and MCX-SX, disposing of the adjudication proceedings initiated against PESB. SEBI’s inspection had indicated that funds were transferred from clients’ bank accounts to PESB’s own bank account on several instances. Further, circuitous fund transfer among PESB’s own bank accounts and various client bank accounts, and transfer of clients’ funds to associates/group entities dealing in commodities business were also observed. Hence it was alleged that PESB had violated provisions of the SEBI (Stock Brokers & Sub Brokers) Regulations, 1992 and SEBI circular dated November 18, 1993, which provides for regulation of transactions between clients and brokers.
PESB stated that it had separate bank accounts for clients’ funds and its own funds and that there was proper segregation. PESB demonstrated valid reasons for the alleged fund transfers. For instance, when a client fails to meet its pay-in obligations as per stock exchange norms, PESB pays clients’ obligations through its own fund and hence transfers funds from its own account to client bank account. Thus the funds transferred to its own account from the clients’ bank belonged to PESB only and there was no scope for mis-utilization of funds. PESB also showed that the alleged circular transactions occurred due to an inadvertent error at its end and it had taken steps to negate the net effect of erroneous entry. Accordingly, the AO concluded that PESB had acted in accordance with the applicable law.
Having appropriate systems and control for proper segregation of clients’ funds and its own funds is one of the most important responsibilities of a registered broker. Any failure in this regard is treated strictly by stock exchanges and SEBI. However, in the instant case the stock-broker was able to demonstrate that it had maintained segregation between clients’ funds and its own funds and utilized clients’ fund for a valid purpose. The case also indicates that small inadvertent errors by a broker may not be penalised, so long as the broker has not failed to exercise due skill and care in the conduct of its business.
