SEBI

Adjudication order in the matter of inspection of Yes Securities India Ltd

SEBI jointly with the Stock Exchanges (NSE, BSE and MCX) had conducted inspection of documents and other records of Yes Securities (India) Ltd Under Section 15 – I Of The Securities And Exchange Board Of India Act, 1992 Read With Rule 5 Of SEBI (Procedure For Holding Inquiry And Imposing Penalties) Rules, 1995  to verify the possible violation(s) of the provisions of SEBI Act, 1992, Securities and Exchange Board of India (Stock Brokers) Regulations, 1992 (“hereinafter referred to as the “Brokers’ Regulations”)  and circulars of SEBI. It was observed that:-

a) Irregularities w.r.t Monthly / Quarterly Settlement of Funds.

b) Reporting and Short Collection of Margin.

c) Irregularities observed w.r.t Margin Trading Funding Verification

d) Discrepancy with respect to reporting of Net worth

e) Incorrect reporting of Enhanced Supervision Data (Weekly)

So, Adjudication proceedings was initiated under Section 15HB of the SEBI Act against the Noticee.

Appointment of adjudicating officer

Ms. Santosh Kumar Sharma was appointed as the adjudicating officer.

Show Cause Notice, Reply and Personal Hearing

Accordingly, a Show Cause Notice was issued dated August 22, 2023 and date of hearing as September 14, 2023. Noticee made the following submissions:-

a) Noticee submitted that it acknowledges the instances wherein it has inadvertently sent the retention statements and statement of accounts beyond 5 days and in some cases, same were sent to incorrect email addresses which was a result of the typographical error and that such errors were immediately rectified and necessary measures have been taken to prevent such occurrences in future.

b) Noticee made a submission that it has a system driven process to collect and report the client margins as per the requirements of the exchanges and that there was no margin shortfall for the client ID: 4002088. It further submitted that the apparent difference of Rs 2,083/- was related to a margin release triggered by the reduction in the client’s position.

c) Noticee also submitted that w.r.t PAN No- AUNPP6815D it had adequate margin and that there was no shortfall for the said client. However, w.r.t client PAN No- ACVPM6312N, it acknowledged that there was an unintended exposure to the client on April 07, 2022 due to human error, which was a rare exception.

d) Noticee further submitted that as per its internal process, it was reporting the exposure amount as a sum of 50% of Net worth + borrowed fund + Client Cash Collateral for Margin Trading Funding up to March 15, 2022 and that its borrowing were always within the regulatory requirements.

e) It further added that the deviation in net worth computation arose from the treatment of trade receivables from two clients, totaling Rs 1, 90, 84,127/- which were aged more than 90 days was not reduced from Net worth as doubtful debts and advances since the same was fully secured against equity shares.

f) Noticee submitted that its back office service provider is “BSE Technologies Limited-Class” and that it is configured and consider NSE VAR margin file with a further submission that its clearing corporation is ICCL which considers margin file of BSE, i.e. for the same script there is a different VAR margin in both exchanges.

g) It also submitted that at BOD, the NSE haircut & closing rate are considered to give limits to clients and since the clearing with ICCL, the EOD margins are collected accordingly. Hence, there is difference in margin utilized for creditors basis difference in margin norms in NSE and BSE VAR file.

h) It further added that as per market practice, it is maintaining and reporting the valuation of securities repledged with CC/CM after considering appropriate haircut i.e. of T-1 day for the purpose of margin utilized for positions of credit balance client across all clearing corporation.

Consideration of Issues and Findings

Issue No. I: Whether Noticee has violated the provisions of SEBI Circulars as mentioned at para 3 above?

Alleged Violation 1: Irregularities w.r.t Monthly / Quarterly Settlement of Funds

It was found that the Noticee had sent retention statements to clients after 5 days of settlement in 30 instances involving 30 clients. Additionally, they sent retention statements and account statements to incorrect email addresses for the retention done on October 7, 2022, in 4 cases. The Noticee admitted these mistakes, explaining that they were due to typographical errors and were promptly corrected. They also assured that measures had been put in place to prevent such errors in the future. However, it’s important to note that they sent the retention statements late, which should have been done within 5 days as per SEBI (Securities and Exchange Board of India) rules, and they also made errors in sending statements to wrong email addresses.

Accordingly the adjudicating officer noted that Noticee has admittedly violated Clauses of SEBI circulars.

Alleged Violation 2: Reporting and Short Collection of Margin

In the Post Inspection Analysis (PIA), it was noted that SEBI had asked NSE (National Stock Exchange) for their comments regarding the response received from the Noticee (the party in question) on the incorrect reporting of a margin amount, specifically Rs 1,52,171.43. NSE responded through an email dated April 11, 2023, stating that there was indeed a wrong reporting of margin, and the correct amount should have been Rs 2,083 (Rs 1,52,171.43 – Rs 1,50,088).

In response to this, the Noticee explained that they have a system-driven process to collect and report client margins as required by the exchanges. They emphasized that there was no shortfall in margins for the client ID: 4002088. The apparent difference of Rs 2,083 was related to a margin release triggered by a reduction in the client’s position.

Adjudicating officer examined the available information, and he have found that similar claims were made during the inspection. However, these claims were not supported by any documentary evidence. Consequently, the exchange confirmed the margin shortfall and alleged incorrect reporting of margin.

Furthermore, the current submissions by the Noticee lack supporting documents, except for Excel sheets, which do not substantiate the Noticee’s claim. Therefore, I find the Noticee’s submission to be untenable.

Based on the above findings, it is evident that the Noticee has violated Clause 6 of SEBI Circular.

Alleged Violation 3: Margin Trading Funding Verification

Noticee did not collect sufficient margin in the form of cash, cash equivalents, and Group 1 equity shares with the appropriate haircut. Upon further investigation, it was found that there was a margin shortfall in 2 out of 20 sampled instances, totaling Rs. 24,49,920.81, concerning client PAN numbers AUNPP6815D and ACVPM6312N, with shortfalls of Rs. 1614.95 and Rs. 24,48,305.86, respectively.

In response to this violation, the Noticee asserted that with regard to PAN No- AUNPP6815D, it had adequate margin, and there was no shortfall for that particular client. However, in the case of client PAN No- ACVPM6312N, the Noticee acknowledged that there was an unintended exposure to the client on April 07, 2022, resulting from human error, which was considered a rare exception.

Adjudicating officer observed a contradiction between respondent statements provided to the inspection team and their current submission. He noted that Noticee has violated Clause 4 and Clause 5 of the SEBI Circular dated June 13, 2017.

Alleged Violation 4: Discrepancy w.r.t Networth verification

The Noticee, as per inspection findings, reported a higher net worth of Rs. 96,86,62,991.00 on September 30, 2022, compared to the inspection team’s calculation of Rs. 94,97,17,920.68, resulting in an overstatement of net worth by Rs. 1,89,45,070.32. In response, the Noticee explained that this deviation occurred due to not reducing trade receivables worth Rs. 1,90,84,127/- from net worth as doubtful debts and advances, as these receivables were fully secured against equity shares.

The adjudicating officer observed that the Noticee’s submission is bereft of merits and he has violated Clause 6.1.1.j of Annexure to SEBI Circular dated September 26, 2016.

Alleged Violation 5: Incorrect reporting of Enhanced Supervision Data (Weekly)

The Inspection Report noted a discrepancy in margin calculations for clients with a credit balance between the inspection team’s calculations and the Noticee’s reported calculations in 3 out of 5 sample data. The Noticee explained that its back-office service provider is “BSE Technologies Limited-Class” and is configured to consider NSE VAR margin files, but its clearing corporation is ICCL, which considers the margin file of BSE. This leads to differences in VAR margins between the two exchanges for the same script. The Noticee clarified that it maintains and reports the valuation of securities repledged with CC/CM after applying the appropriate haircut for margin utilization, following market practice.

Issue No. II: If yes, does the violation, on the part of the Noticee would attract monetary penalty under Section 15HB of the SEBI Act, as applicable?

As it has been established that the Noticee has violated following provisions of SEBI circulars, the adjudicating officer is of the view that the Noticee is liable for imposition of monetary penalty under Section 15HB of the SEBI Act.

Issue No. III: If so, what would be the monetary penalty that can be imposed upon the Noticee taking into consideration the factors stipulated in Section 15J of the SEBI Act?

While determining the quantum of penalty under Section 15HBof the SEBI Act, it is important to consider the factors stipulated in Section 15J of the SEBI Act.

Adjudicating officer observed that the available material does not provide quantifiable information regarding any disproportionate gains or unfair advantages obtained by the Noticee or the losses incurred by investors due to the violations. It is also unclear whether these acts by the Noticee are repetitive. However, it’s essential to emphasize the crucial role of a Broker/Trading Member (TM) in the securities market, especially in facilitating small investors’ entry. TMs are the first point of contact for these investors, and their compliance with regulations, SEBI/Exchange circulars, and guidelines is vital. The Noticee’s non-compliance highlighted in the preceding paragraphs indicates a failure in fulfilling its fiduciary duties to its clients.

Order

The adjudicating officer imposed penalty of Rs. 5,00,000/-(Rupees Five Lakhs Only) for Section 15HB of the SEBI Act. The Noticee shall remit / pay the said amount of penalty within 45 days.

Adjudication-order-in-the-matter-of-inspection-of-Yes-Securities-India-Ltd