SEBI Grants Clearance to IndusInd Securities After Compliance Failures, Citing Proportionality and Management Change

SEBI Grants Clearance to IndusInd Securities After Compliance Failures, Citing Proportionality and Management Change​

The market witnessed a significant regulatory resolution as the Securities and Exchange Board of India (SEBI) issued its Final Order in the matter concerning Reliance Securities Limited (now operating as IndusInd Securities Limited). Despite the company being found guilty of multiple serious compliance violations spanning over two years, SEBI disposed of the Show Cause Notice (SCN) without issuing any directions, granting a crucial reprieve to the firm.

The proceedings centered on comprehensive findings derived from an inspection conducted between April 2021 and November 2022. The allegations included critical issues related to client fund settlement, margin trading discrepancies, and operational reporting shortfalls, raising questions about adherence to various SEBI circulars.

Scope of Compliance Violations Addressed by SEBI​

The regulatory investigation examined numerous alleged violations across several aspects of the securities business. Key findings committed against IndusInd Securities Limited included:

• Non-Settlement of Funds: It was observed that funds belonging to inactive clients were not settled on a quarterly basis for 122 instances, and funds of clients who did not trade in 30 calendar days remained unsettled in 10,102 instances, totaling Rs. 28,52,17,101.
• Record Keeping & Reporting: Violations were established regarding the reconciliation of client ledger balances compared to back-office statements across seven sample instances. The company also faced allegations related to stock mismatch in holding reports (4 instances) and incorrect reporting in Daily Margin Statements amounting to Rs. 1,87,46,763 for three instances.
• Operational Missteps: Issues included failure to collect adequate margin and concerns over enhanced supervision data and client-level cash/cash equivalent balance reporting across various dates. One serious finding was the misreporting of total funds available in Bank during Risk Based Supervision (RBS) by Rs. 3,12,57,50,531.99 compared to the actual amounts available with clearing corporations (CC/CM).

Company Defense and Mitigation Arguments​

IndusInd Securities Limited submitted a detailed reply addressing all the observed violations. The company contended that many discrepancies were due to clerical errors or back-office system issues which had been rectified.

The firm specifically addressed the allegations regarding the temporary lending facility by stating it was not in the ordinary course of business and involved funds from its own reserves, citing past favorable rulings from the Securities Appellate Tribunal (SAT). Regarding client order placement evidence, the company noted that transactions were confirmed through centralized service calling, which is a standard practice in their operations.

SEBI’s Final Verdict: Finding No Penalty Warranted​

The Quasi-Judicial Authority took into account all the established violations but ultimately found no basis to impose further penalties or directions against the Noticee. This decision hinged on several key considerations.

A critical mitigating factor was that a prior Adjudication Order, issued in December 2024 for identical allegations, had already imposed and the Noticee had complied with a penalty of Rs. 7 Lakh. The regulatory body noted that enforcement proceedings and adjudication processes are separate entities.

Furthermore, SEBI considered the company’s structural changes. IndusInd Securities submitted that its management had been changed subsequent to the inspection period (which concluded in November 2022). The company argued for the application of the "clean slate principle" as it is a transferee company and should not be held liable for violations committed by the previous regime, thereby preserving market confidence during its current revival process.

In view of these submissions, the Authority agreed that given the corrective measures taken and the payment of prior penalties, no further penalty was warranted in light of the facts and circumstances presented. Consequently, SEBI disposed of the SCN without issuing any adverse directions.