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SEBI Imposes Penalty on Axis Securities Limited for Regulatory Non-Compliances

The Securities and Exchange Board of India (SEBI), vide an adjudication order (Order) dated 21 February 2025 penalised Axis Securities Limited (Axis Securities) for several non-compliances with various regulatory circulars applicable to them.

Brief Background and Facts:

The SEBI inspection revealed several non-compliances related to enhanced supervision reporting, stock reconciliation, client fund settlements, passing on exchange penalties, improper handling of client securities, inadequate grievance redressal, discrepancies in PEP reporting, and excessive exposure in margin trading.

Alleged Violations:

The Show Cause Notice (“SCN”) outlined various violations thereafter confirmed in the Order. These alleged violations were:

  • Discrepancies in Enhanced Supervision Reporting: Axis Securities had allegedly reported incorrect information in their enhanced supervision reports to the exchanges. Specifically:

    • (a) An amount of ₹50 Lakhs was reported as collateral, when it was actually a deposit towards Base Minimum Capital (BMC) in NCDEX.

    (b) A Bank Guarantee of ₹1 Crore was reportedly double-reported in October 2022.

  • Discrepancies in Stock Reconciliation: Reconciliation of weekly holding statements (WHS) submitted by Axis Securities to the Stock Exchanges with the actual stock lying in DP accounts as on 30 November 2022, revealed mismatches:

    • (a) Stocks (ISIN – 13, Quantity – 11,174, Value – ₹0.37 Crores) were reported in the WHS but were not found in DP holdings.

    (b) Stocks (ISIN – 122, Quantity – 3,38,388, Value – ₹3.09 Crores) were not reported in the WHS but were present in DP holdings.

    (c) Investment of Axis Securities in Max Life Insurance Company Ltd. (Quantity – 1,91,88,128, Value – ₹242.21 Crores) in its proprietary account was not reported in the WHS.

  • Improper Client Fund Settlement: Axis Securities had failed to settle clients’ funds and securities on a monthly/quarterly basis according to the preferences obtained from clients. Furthermore, the retention statements were not sent to the clients along with the statement of accounts.

  • Passing on Exchange Penalties to Clients: Axis Securities purportedly passed on penalties imposed by Stock Exchanges for short collection of upfront/nonupfront margin to its clients.

  • Transfer of Securities to "Client Unpaid Securities Account": Axis Securities is alleged to have transferred securities of clients having a credit balance of funds with the Axis Securities to a "client unpaid securities account,".

  • Inadequate Grievance Redressal: Axis Securities allegedly failed to properly redress the complaints and grievances of its clients, that shows inadequate customer service and grievance resolution mechanisms.

  • Discrepancies in PEP Reporting: The count of Politically Exposed Persons (PEP) reported under the Risk Based Supervision data submitted by Axis Securities to the Stock Exchange did not align with the clients marked as PEP in the Unique Client Code (UCC), indicating inaccurate reporting of PEP clients under Risk Based Supervision data.

  • Excessive Exposure in Margin Trading: The exposure of Axis Securities towards Margin Trading funding exceeded the allowable threshold. Additional exposure of ₹17.40 Crores was given to clients in six instances. Moreover, there was a shortfall in the margin collected from one client.

    • Mitigating Factors Considered:

    The Adjudicating Officer considered the following mitigating factors for computing the quantum of penalty:

  • Axis Securities engaged Shah Kapadia & Associates, an external audit firm, for verification of data before reporting of WHS to the exchanges and to review and verify the process of settlement of client funds.

  • Axis Securities took corrective action and immediately started including the investment in Max Life Insurance Company Limited in its WHS reporting.

  • NSE had already penalized Axis Securities for the discrepancy in WHS reporting.

    • SEBI's Decision:

    After considering the inspection report, the SCN, and Axis Securities' reply, SEBI passed an order finding that Axis Securities have violated various circulars of SEBI, MCX, NCDEX, etc. Accordingly, SEBI imposed a penalty of ₹10,00,000/- (Rupees Ten Lakhs Only) on Axis Securities Limited under Section 15HB of the SEBI Act.

    This order against Axis Securities underscores SEBI's focus on maintaining the integrity of the securities market and protecting investors' interests. By addressing discrepancies in reporting, client fund handling, and adherence to margin requirements, SEBI aims to ensure that stock brokers uphold the highest standards of regulatory compliance and prioritize investor protection.

    The views expressed in this update are personal and should not be construed as any legal advice. Please contact us for any assistance.

    Authored By:  Mr Bhushan Shah, Partner and Mr Abhishek Nair, Associate.

    Content supplied by Mansukhlal Hiralal & Company