Market regulator Securities and Exchange Board of India (SEBI) has cancelled the registration of Berkeley Securities Ltd (BSL) due to multiple and severe regulatory violations. The violations include misuse of client funds, issues with the timely settlement of funds and securities, improper naming of bank accounts and shortcomings in reporting and margin collection.
Other significant violations cited by SEBI include lapses in the client registration process, terminal verification and certification, net worth verification and inadequate weekly analysis of enhanced supervision data.
SEBI also noted Berkeley Securities' non-compliance with brokerage requirements, internal alerts at the exchange level, and cybersecurity standards like standardisation testing and quality certification (STQC) and vulnerability assessment and penetration testing (VAPT). Furthermore, there were issues with the handling of related party loans.
In the order, G Ramar, chief general manager (CGM) of SEBI, says, "The fact that penalty has already been imposed in the adjudication proceeding may be taken as a mitigating factor, however, even after considering this mitigating factor, it is seen that there are certain violations viz. misuse of clients' fund, non-maintenance of minimum net worth, cyber security and cyber resilience which cannot be considered as technical violations of minor nature. These violations committed by Berkeley Securities are undoubtedly grave in nature and prejudicial to the interest of investors in the securities market."
SEBI conducted a joint inspection of Berkeley Securities from 16th November to 22 November 2022.
This inspection revealed that Berkeley Securities misused client funds in 23 out of 44 instances, with an average misuse of Rs62.71 lakh. Berkeley Securities admitted to errors in handling client funds, correcting issues identified between July 2021 and September 2022. However, SEBI regulations require a strict separation between client and broker funds, and it was confirmed that Berkeley Securities had misused funds to cover debit balance obligations, constituting a grave violation.
SEBI's inspection also highlighted the failure of Berkeley Securities to settle funds for active clients in 19 cases, totalling Rs95.13 lakh, with retention statements not issued in 38 instances. Discrepancies in ledger balances and margin amounts were found in 20 cases which Berkeley Securities attributed to system errors and incorrect calculations by the inspection team. Inactive clients' funds were not settled in 356 instances, totalling Rs99.98 lakh, with insufficient evidence provided to support Berkeley's explanations.
Additionally, the broker did not maintain proper nomenclature for three client accounts, violating SEBI's circular, which requires clear naming to reflect the account's purpose. One account was dormant and pending renaming, but compliance was not achieved.
The verification of securities revealed that Berkeley Securities incorrectly reported demat holdings for eight international securities identification numbers (ISINs), claiming it was a technical error corrected by software.
The regulator's inspection also uncovered penalties totalling Rs1.12 lakh imposed by Berkeley Securities on 34 clients for upfront margin shortfalls attributed to system errors and client delays. However, SEBI's guidelines prohibit passing such penalties to clients without valid justification.
Furthermore, Berkeley Securities failed to complete client know-your-customer (CKYC) for 75 clients and did not document actions taken against a client by SEBI. Running account authorisations were not dated for ten clients, and one client's KRA (KYC registration agency) status was unavailable. The broker failed to provide online account closure options, claiming these were clerical errors, but lacked evidence to support their claims.
Berkeley Securities also submitted incorrect office pin codes and failed to provide National Institute of Securities Markets (NISM) certificates for two out of four approved users, despite Regulation 3(2) requiring certificates to be obtained within a year of employment.
As of 31 March 2022, Berkeley Securities reported a net worth of Rs2.25 crore, but after necessary deductions, the revised net worth was Rs50.42 lakh, below the Rs1 crore minimum required for currency derivatives dealers. It claimed that a software error caused this discrepancy, which has since been corrected, but this violation indicates non-compliance with Stock Brokers Regulations.
The inspection revealed multiple discrepancies, including 34 mobile number mismatches, 42 email ID mismatches, and 28 email IDs linked to 60 clients, preventing the issuance of contract notes. The company argued that only two lapses remained nonrectified and attributed multiple links to family accounts, asserting that contract notes were issued without complaints. However, the inspection findings confirmed violations.
Additionally, the verification of contract notes revealed that Berkeley Securities charged brokerage rates above the agreed amount of Rs20 per lot. For instance, on 15 March 2022, a client was charged Rs219.47 instead of the consented rate due to a clerical error.
A cybersecurity audit conducted from 1 October 2021 to 31 March 2022, revealed that Berkeley Securities lacked STQC certification and did not conduct VAPT. Although a VAPT report was submitted to NSE on 22 October 2022, it did not cover the audit period.
Finally, the inspection found that Berkeley provided loans totalling Rs3.78 lakh to two related parties, Berkeley Finance Ltd and Berkeley Automobile Ltd. The broker claimed that these loans were for car repairs and that the loan to Berkeley Finance had been repaid. However, relevant documentation was not provided to substantiate these claims and Berkeley Securities failed to demonstrate that the loans were related to its securities business.
