SEBI Slaps Rs3 Lakh Penalty on RK Global Shares and Securities for Client Fund Settlement Violations

Moneylife Digital Team 11 November 2024

Investor Interest

Market Regulator Securities and Exchange Board of India (SEBI) has levied a penalty of Rs3 lakh on RK Global Shares and Securities Ltd for failing to adhere to essential client fund settlement guidelines.

In an order, Amar Navlan, adjudicating officer (AO) of SEBI, says, "I note that RK Global Shares and Securities, being a SEBI registered stockbroker, was required to comply with the extant applicable provisions of stated SEBI circulars and securities laws, which it failed to... Such non-compliance accordingly needs to be dealt with suitable penalty."

This action stems from SEBI's findings of multiple regulatory breaches following a joint inspection of RK Global Shares and Securities conducted in collaboration with stock exchanges. The inspection covered the period from 1 April 2022 to 31 May 2023.

SEBI inspection report indicated that the stockbroker failed to comply with essential settlement regulations. The stockbroker was responsible for conducting settlements on the first Friday of each quarter from October 2022 to April 2023. However, the findings highlighted that RK Global Shares and Securities did not settle active client accounts in 31 instances out of a total of 3,750 cases involving Rs8.275 lakh.

Additionally, for the first quarter of FY22-23, the broker did not settle one active client's funds, totalling Rs76.37 lakh, until the subsequent quarter.

RK Global Shares and Securities' violations extended to inactive clients as well. SEBI discovered that out of 19,623 instances where inactive clients had a credit balance and no transaction within the previous 30 days, the broker failed to settle accounts in 337 instances, impacting Rs99.33 lakh. According to SEBI regulations, brokers must return credit balances to clients who have not transacted within 30 days.

In response, RK Global Shares and Securities contended that these issues were due to technical and administrative errors. The broker claimed that system-driven processes occasionally failed to reflect certain client accounts, resulting in delays. However, SEBI dismissed these explanations as insufficient.

The regulator noted that RK Global Shares and Securities did not provide adequate documentary evidence, such as bank statements, to substantiate the alleged efforts to address and correct these issues.

Further scrutiny revealed that in specific cases where clients had bank account mismatches, RK Global Shares and Securities delayed settlements, sometimes by a full quarter, rather than making corrections promptly. In other instances, the broker cited complications with NRI clients, claiming that these accounts required specific bank instructions for settlement. However, SEBI found this explanation unsupported, as no documentation was provided to prove the need for specialised handling.

Despite RK Global Shares and Securities claims that only a fraction of client accounts were affected and that measures were taken to address the issues, SEBI deemed the explanations insufficient. The broker's reliance on internal ledger and retention statements as evidence was considered inadequate, as these are not verifiable records for regulatory compliance purposes.

Based on the inspection findings, SEBI emphasised that regular settlement of client funds is a fundamental responsibility of stock brokers, ensuring transparency and protecting client interests.

Given the severity of the violations and RK Global Shares and Securities' failure to provide credible evidence or sufficient corrective actions, SEBI imposed a penalty of Rs3 lakh on the broker under Section 15HB of the SEBI Act, 1992, deeming it proportionate to the infractions.

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