SEBI Slaps Rs3 Lakh Fine on Federal Capital Markets for Unauthorised Financial Activities

Moneylife Digital Team 01 August 2024

Investor Interest

Securities and Exchange Board of India (SEBI) has imposed a penalty of Rs3 lakh on stockbroker Federal Capital Markets Ltd for compliance breaches and conducting unauthorised financial activities.

In an order, N Hariharan, adjudicating officer (AO) of SEBI, noted that Federal Capital Markets was engaged in a business other than that of securities involving personal financial liability where it had provided advances to customers amounting to Rs94.06 lakh and had taken advances from the clients worth Rs1.56 lakh during the inspection period.

Federal Capital Markets, registered with SEBI as a stock, underwent an inspection by SEBI covering the period from 1 April 2022 to 30 November 2023.

The inspection of Federal Capital Markets revealed several compliance issues. A significant finding was related to the audited balance sheet as of 31 March 2023. It was discovered that the stockbroker had provided advances to customers amounting to Rs94.06 lakh and had taken advances from clients totalling Rs1.56. These transactions indicated engagement in business activities other than securities, which involved personal financial liability, SEBI says.

The balance sheet of the stockbroker showed an entry for 'advance from clients' under 'other current liabilities', amounting to Rs1.56 as of 31 March 2023. Federal Capital Market claimed that this amount was received from clients before the activation of their demat accounts and was subsequently deposited into an upstream account for a designated client.

However, this claim lacked supporting evidence, and discrepancies were noted in the amount reported, SEBI says. "Federal Capital Markets contention that the balance sheet had been rectified in subsequent reports was also unsubstantiated, as no documentation was provided to confirm the corrections."

Further, the balance sheet also indicated 'other advances – customer' under 'long term loans and advances, amounting to Rs94.06 lakh as of 31 March 2023. Federal Capital Markets argued that this amount was a classification error, representing trade receivables rather than actual advances.

Despite submitting a letter from its auditor confirming the error, the lack of reference to this error in the auditor's report attached to the balance sheet raised doubts about the stockbroker’s claim. “The letter, dated 8 July2024, appeared to be an afterthought, created post-hearing, and thus could not be accepted as credible evidence,” SEBI says.

Federal Capital Market's actions were found to violate Rule 8(3)(f) of the Securities Contract Regulations Rules, 1957, BSE notice no20220107-45 dated 7 January 2022 and Clause A(5) of the code of conduct for stock brokers specified under Regulation 9 of SEBI stock brokers regulations. These rules prohibit stockbrokers from engaging in any business or activities involving personal financial liability other than securities or commodity derivatives business.

Considering the established violations, the Federal Capital Market was found liable for Rs3 lakh penalty under Section 23H of the Securities Contracts Regulation Act, 1956, and Section 15HB of the SEBI Act.

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