The Multi Commodity Exchange (MCX) has imposed a fine on India Infoline Commodities (IICL). It is learnt that MCX had imposed a fine of more than ₹5.2 crore on IICL, now acquired by IIFL, for allegedly inflating the fixed deposits (FDs) of clients, false reporting of margins and more such violations for four consecutive financial years. However, the order was not uploaded on its website for the benefit of investors and traders.

Stock and commodity exchanges upload the orders they pass, on their respective websites so that investors and traders can make informed decisions. SEBI has issued informal guidelines and advisories with regard to the same, legal experts say. Since exchanges are first-level regulators, the disclosure and transparency parameters in their bylaws require such market-linked important information and orders to be made public.  MCX did not comment on the query from BusinessLine on the non-disclosure of the orders. Rule 7.1(g) of MCX bylaws, as notified in Gazatte of India, says that the exchange will report on its website any disciplinary action it took against its members.

Challenging the 2021 MCX order

MCX has been probing IICL for the past few years and the exchange had passed its first order against the broker in 2021. IICL challenged the same in the Securities and Appellate Tribunal (SAT) claiming that the order was not passed by a relevant authority. The order was passed by MCX chief regulatory officer Sanjay Golecha. In February this year, MCX board members including Saurabh Chandra, PS Reddy and Pravin Tripathi passed four orders against IICL, which have been kept under the wraps so far. BusinessLine has a copy of the orders.

MCX probe revealed that the study of just six sample days during a financial year indicated that IICL had inflated client FDs between 86 and 1,668 times. While the broker blamed a ‘bug’ in its tech systems for the massive inflation in numbers, the MCX committee says that it did not find any conclusive evidence in support of such an argument. Also, the broker did not disclose the information about the bug voluntarily, but it was detected during the system audit by MCX.

“There is no conclusive evidence which suggested that the bug was resolved, as claimed by IICL. There is no documentary evidence which specifies the date of the detection of the system bug and thus there is no evidence to determine on which date the system bug was resolved either,” MCX said. 

Other violations

The order also says that IICL had more than one lakh clients and a few violations were detected only from the study of just 50 clients. MCX found that IICL had reported inflated FDs and wrong margin collections to the tune of ₹3.28 crore of just four to seven clients of the 50 clients they studied during one financial year. The same violations were found in other FYs as well, the order reveals. Again from a study of limited samples, the probe found accounts of 56 clients were not settled by the broker for 2-14 years since their last trades. Quarterly and half-yearly settlement of several other clients was not done regularly by the broker in the four FYs under probe.

In the four FYs under study, there were several instances of false, incorrect reporting of margin collection by the broker. In 2016, IICL collected margin of ₹3.69 crore, but reported collection worth ₹4.23 crore. MCX has alleged that IICL had also indulged in incorrect reporting of client information with regard to their financials and could not support its arguments with evidence on why it could not settle client accounts on time.

There was no maintenance of documented error policy; IICL did not upload KYC details of clients on several instances, trading terminals uploaded by the broker with MCX were not available at the inspection location and those available lacked information available with the exchange. Digitally-signed contract notes too were not in accordance with IT Act 2000. Client registration documents did not include the mandatory ones. Experts say that since all this was revealed in a limited sample probe by the MCX, a further detailed probe is required as the violations are serious in nature.

“Margin collection and correct reporting were indispensable factors in maintaining the integrity of the markets and its failure could play havoc,” MCX said in its order.

Appeal before SAT

When contacted, IIFL said, “The inspection was conducted for four financial years and penalty was levied for those four FYs. Since the initial orders levying the penalty were not passed by the relevant authority without providing the opportunity of hearing, the company preferred an appeal before SAT, which referred the matter back to MCX relevant authority to pass appropriate orders after providing personal hearing. In February 2022, MCX relevant authority passed the orders without accepting our submissions. Hence, aggrieved by the said orders, IICL has preferred an appeal before the SAT on the ground that the incorrect margin reporting was due to system/technical bug or error and was unintentional.”

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