Sebi Fines Broker For Record-Keeping, Disclosure Lapses

The Securities and Exchange Board of India (Sebi) on July 22 imposed a Rs 4 lakh penalty on Pace Stock Broking Services after finding serious deficiencies in its record-keeping and procedural matters relating to maintenance of records and related operational requirements. The regulator found the lapses during its investigation into the alleged front-running of Axis Mutual Fund trades.

However, the adjudication order does not hold Pace Stock Broking Services Private Limited guilty of front running, nor does it record any finding that the company indulged in any front running activity.

The action forms part of Sebi's wider probe into the alleged front-running of Axis Mutual Fund trades executed between April 1, 2020, and March 31, 2022. In an interim order passed in March 2023, the regulator had alleged that Viresh Joshi, then chief dealer at Axis Mutual Fund, passed on confidential information about the fund house's impending trades to a network of market participants, who allegedly executed trades ahead of the mutual fund's orders to profit from the subsequent price movement.

The latest order, however, does not determine whether Pace Stock Broking participated in the alleged front-running. Instead, Sebi examined whether the broker complied with its regulatory obligations while the investigation was underway. Sebi concluded that the broker did not keep mandatory trading records, used the credentials of a person who was not an authorised dealer to obtain trading terminal IDs, and submitted incorrect information during the investigation.

Missing IP Address Records

A key finding in the case was the broker's failure to maintain trading records. As part of its investigation, Sebi asked the firm to share trader-wise IP address details for 93 trades. However, the broker could not furnish the information. Instead, it submitted only location-wise IP and MAC address details, saying it was "unable to ascertain the particular MAC ID/IP address that were used by each of the traders of that location."

Sebi did not accept the explanation and said, "Noticee could not trace the corresponding IP addresses in the 93 instances."

The broker said the records could not be maintained because of technical issues and disruptions during the Covid-19 pandemic. However, Sebi rejected the explanation, saying that merely citing technical difficulties without any supporting documents or evidence cannot justify non-compliance.

The order also noted that it had not given any exemption during the pandemic that allowed brokers to stop maintaining such records.

Dealer Credentials Used For Trading IDs

Sebi also found irregularities in the way the broker obtained trading terminal IDs and user IDs from the National Stock Exchange (NSE).

According to the order, the broker used the credentials of Kaleeswaran Pandian to obtain trading terminal IDs and user IDs between September 2015 and April 2022, even though he was not a dealer or an approved person during the investigation period. The broker said this happened because of a copy-paste error and claimed the terminal was actually being used by another dealer, Rajeev Ranjan.

Sebi did not accept the explanation, saying, "The renewal/update of the same details over a prolonged period is inconsistent with the Noticee's plea of a one-time inadvertent clerical or copy-paste error."

The regulator said it was the broker's responsibility to ensure that trading terminals and user IDs were correctly mapped to authorised dealers.

"The primary responsibility to ensure correct mapping of terminal IDs, user IDs and dealers rests with the trading member."

Based on the records, Sebi concluded, "The credentials (KYC, NISM certificate, etc) of Mr Kaleeswaran Pandian were used by Noticee to obtain trading terminal IDs and user IDs from NSE for its branches located at Chennai and Ghaziabad."

Sebi Says Broker Misled Investigation

Sebi also found that the broker gave incorrect information during the investigation. According to the order, the broker told the regulator that Rajeev Ranjan was the approved dealer for a particular user ID during the investigation period. However, NSE's audit trail showed that Ranjan was linked to that user ID only after the investigation period had ended.

Sebi said the broker's submission was not correct.

"The information forwarded by Noticee... with respect to the dealer, Mr Rajeev Ranjan, during the course of investigation was incorrect and wrong."

The regulator said providing incorrect information made its investigation more difficult.

"The failure on the part of Noticee to furnish correct information has, to an extent, hampered the instant investigation."

'Not A Mere Procedural Lapse'

The broker argued that the issue was limited to just one CTCL ID out of more than 2,500 trading terminals and should be treated as a minor procedural lapse.

Sebi rejected the argument, noting that the discrepancy continued for nearly seven years and remained uncorrected despite several renewals and updates of the trading IDs.

"The violations... cannot be characterised as a mere procedural or technical lapse."

The regulator also said that large brokers are expected to have strong systems and internal controls to prevent such lapses. Finding the broker guilty of violating Sebi regulations, NSE circulars and provisions of the Sebi Act, the market regulator imposed a Rs 4 lakh penalty.