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Unveiling the Truth: The Controversial Practices of a Prominent Brokerage House

  • Jun 27, 2023
  • 6:37 pm

On 19th June 2023, SEBI barred IIFL securities from taking on any new clients for 2 years on the ground of breach of the code of conduct of regulators of stock brokers. 

The issue dates back to an investigation from 2014 when SEBI conducted an inspection of their books of account to check whether they were compliant with the regulators or not. 
The major incidents that led to the witness's suspicious behaviour can be traced back to 2011 when India Infoline Financial Services, a subsidiary of an NBFC, raised $725 million through NCDs while being hesitant to embrace the oversubscription limit.

"The company was adamant about increasing its financial leverage and expressed confidence, stating that IIISL could effectively manage loan defaults despite the rising delinquencies in the system. This determination remained strong despite the high cost of borrowing at the time and the Reserve Bank of India's decision to revise the credit growth projection from 19% to 16-18% due to increased interest rates.

The parent firm, IIFL, played a crucial role as the main source of capital investment. By adequately managing its loan book, IIFL enabled IIISL to protect its net operating margin."


IIfl had a loan book that was amounting to approximately 3300 crore with 60% of the loan raised from mortgage loans. 

Despite having high-interest rates and borrowing costs, the parent company's authorization of the subsidiary's buoyant credit growth and its use of less liquid or fungible assets to secure the subsidiary's claims were among the first signs of speculative activity to catch the attention of the government.

At the beginning of the fiscal year 2013, IIFL Inc. purchased shares of Shriram City Union Finance. However, investors generally perceive this dilution of a stake through the raising of equity capital as an unfavourable move, as it increases financial difficulties for the company. This acquisition also sparked debates among the firm's High Net Worth Individual (HNI) clients. The company in question acquired over 8 lakh shares of NBFC Shriram City Union Finance in open market transactions, with a total value of 100 crores, and the entire transaction was valued at 99.5 crores. The shares were bought at an average price of 1228.48 rupees.

Meanwhile, a total of 7.64 lakh shares were acquired by 2 of it’s major shareholders – norwest venture partners and IDBI trusteeship services ltd for 3.98 lakh shares and 3.70 lakh shares respectively. 

Over the period of 2 years during the end of the fiscal year of 2013, IIFL further raised 628 crores through alternative investment funds.



It was the largest principal raised through AIF so far As per SEBI's guidelines notified in May last year, AIFs are funds set up for the rationale of raising capital for investing in a predetermined policy.

IIFL Income Opportunities Fund, a category II AIF, is a closed-ended debt scheme that will invest in debt-related instruments of good corporate with good periodic cash flows. Category II AIFs, which can include private equity funds or debt funds, have no investment restrictions but are not allowed to leverage. 

The significant increase in debt and equity proportions not only resulted in more government speculation, but it also had greater variability in the firms operating income from a disgraceful increase in the firm's business risk; at the time, IIFL had a volatile cash flow that appeared to have taken a toll in the later years.

According to company records of the payments due at the end of the fiscal year 2016–17, the company was required to repay the principal on maturity for the aforementioned NCDs. However, the issuer in question appears to have chosen otherwise. The decline in the real estate market during the 2017 recession made it difficult for the company to meet its obligations on the mortgage loans that the issuer had issued. It became extremely difficult for the corporation to spawn internal sources of capital to pay off its debts using its retained revenues due to an already erratic series of cash flows the company had endowed itself with. 

From a series of stringent inspections and research for loopholes for the aforementioned reasons, the breaches in the ethical code of conduct were predicted by the government as they found.

During the inspection, SEBI found that IIFL Securities did not segregate its own funds from clients’ funds, and misused credit balances in clients’ funds for the benefit of clients having debit balances.

Following this, SEBI conducted a series of inspections, followed by two separate inquiry proceedings against the brokerage.

The regulator found that funds were regularly being transferred from client bank accounts and clients’ dividend accounts to the pool accounts of IIFL, which were managed and controlled by IIFL as its own bank account.

In the final order, the market regulator Securities and Exchange Board of India (SEBI) stated, "Upon finding evidence of fund mixing and usage of money from such mixed funds for proprietary use of the Notice, a need was felt to examine if clients' funds were being misused after such mixing.

IIFL Securities received two showcase warnings from SEBI, one in May 2017 and the second in October 2021.

After a thorough inquiry that lasted more than six years, SEBI found IIFL Securities guilty and prevented it from accepting new clients.

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