Market regulator Securities and Exchange Board of India (SEBI) has penalised Mumbai-based Suresh Rathi Securities Pvt Ltd (SRSPL) Rs3 lakh for various regulatory violations, highlighting the company's admission of lapses in monitoring and reporting suspicious transactions.
In an order, Shashi Kumar Valsakumar, adjudicating officer (AO) of SEBI, says, "I cannot ignore the fact that as a SEBI registered intermediary, Suresh Rathi Securities was under a statutory obligation to abide by the provisions of the SEBI Act, Rules and Regulations and Circulars or directions issued there under, which it failed to do. Such disregard for the provisions of law governing the functioning of intermediaries calls for an appropriate penalty which should act as a deterrent."
Suresh Rathi Securities is a SEBI-registered stockbroker.
SEBI conducted a thematic inspection focused on a common mobile number and email ID linked to multiple unique client codes (UCCs) and to assess compliance with provisions under the SEBI Act, 1992. The inspection took place between 16 October 2023 and 17 October 2023, covering the period from 1 April 2022 to 31 August 2023.
SEBI's inspection highlighted several key non-compliances related to know-your-customer (KYC) verification, including the non-dispatch of complete client registration documents within seven days of UCC upload for 32 out of 50 sampled clients. While SRSPL had provided proof of delivery for some clients, the dates were overwritten in many cases, making them unacceptable as evidence.
Furthermore, for 20 clients, Aadhaar masking was not done during the inspection period, though SRSPL rectified this for 16 clients post-inspection. Despite the rectification, SEBI emphasised that post-inspection compliance does not absolve SRSPL of liability for non-compliance during the inspection period.
Mr Valsakumar, the AO of SEBI, also found that blank authority letters in favor of authorised representatives were by default, signed for 59 clients. SRSPL argued that such letters were marked as voluntary, and blank signed letters were struck off for client safety. However, SEBI was not fully satisfied with this explanation, particularly concerning physical KYC forms, and established that the violation existed during the inspection period.
SEBI further observed that the running account authorisation had not been correctly obtained from clients who opted for running account settlement. SRSPL acknowledged this issue and modified its online KYC registration process to address it. However, the inspection revealed that proper running account authorisation was not in place for seven clients, confirming non-compliance with SEBI's master circular provisions.
In addition to KYC-related issues, SEBI's inspection identified failures in SRSPL's client due diligence processes. Specifically, the stockbroker did not adequately verify whether the margin requirements were in proportion to the income declared by the clients. This failure was observed in 12 instances about nine UCCs, where the trading activities were disproportionate to the declared income of the clients.
Although SRSPL claimed to have closely known these clients and updated their income ranges post-inspection, SEBI did not find this explanation satisfactory.
Moreover, SEBI noted that SRSPL lacked a mechanism to monitor and report suspicious transactions where trading activity was not commensurate with the client's income. SRSPL did not provide a response to this observation, leading SEBI to conclude that the violation existed during the inspection period.
