SEBI Imposes Rs 9 Lakh Fine on Stock Broker for Client Account Irregularities

In a unique case, the Securities and Exchange Board of India (SEBI) has imposed a penalty of Rs 9 lakh on Stocking Services Limited, a stock broker, after an inspection revealed over 1,100 client accounts with unusual and non-compliant relationship classifications. The accounts, linked to clients aged between 34 and 100 years, categorized their relationship status as ‘dependent children,’ a violation of SEBI’s regulations.

SEBI’s Inspection Findings

SEBI’s investigation, carried out from April 1, 2022, to June 20, 2023, as part of a thematic inspection on ‘Multiple UCCs (Unique Client Codes) mapped to common email IDs or mobile numbers,’ identified several serious lapses in Stocking Services Limited’s client onboarding process:

• Violation of Relationship Data: 1,103 UCCs were found to have improperly classified relationship data, with clients listed under ‘dependent children,’ which does not align with regulatory norms.
• KYC Mismatches: For 13 clients, the relationships recorded in the back office did not match those provided in their Know Your Customer (KYC) forms and consent letters.
• Missing Relationship Details: Four clients were found to have completely missing relationship details in their KYC forms.
• Irregular Client Mapping: 234 clients had their email IDs linked to multiple accounts, while 177 clients had their mobile numbers used across multiple accounts, raising concerns over data accuracy and compliance.

Penalty and Directives

As a result of these violations, SEBI has directed Stocking Services Limited to pay a penalty of Rs 9 lakh, which must be settled within 45 days. SEBI’s inspection report has emphasized the need for the stock broker to adhere strictly to regulatory standards, particularly regarding client identification and relationship data.

Stock Broker’s Defense

In response to the violations, Stocking Services Limited defended itself, stating that many of its clients are senior citizens or individuals who were not familiar with the regulatory requirements at the time of account opening. The broker claimed that these clients did not have individual email IDs or mobile numbers initially, leading to difficulties in complying with current regulations. However, the company assured that it was in the process of rectifying the discrepancies and bringing its records in line with SEBI’s requirements.

This case highlights the importance of maintaining accurate and compliant client records in the securities industry, especially in the wake of increasing regulatory scrutiny.