Client fund segregation rules: retrospective challenge to later penalty circular failed, while violation under earlier SEBI norms stood.

The applicable standard for misuse of client funds was the 18 November 1993 SEBI circular, which prohibited drawing client money for purposes other than those permitted, together with Regulation 26(xiii) of the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992, which requires segregation of a broker's own funds and client funds and bars use of client funds for the broker's own purposes or for other clients. The 26 September 2016 circular was used only for penalty computation and did not govern the substantive finding for the relevant period. The challenge based on retrospective application therefore failed, and the finding of misutilisation and lack of segregation was upheld.

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Issues: Whether the penalty imposed for misutilisation of client funds could be assailed on the ground that the later circular of 2016 was applied retrospectively to an earlier inspection period, and whether the finding of violation under the 1993 circular and the brokers' regulations suffered from legal error.

Analysis: The applicable standard was the SEBI circular of November 18, 1993, which prohibited drawing client money for purposes other than those permitted under the circular. Regulation 26(xiii) of the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 separately made a stock broker liable where its own funds or securities were not segregated from client funds or securities or where client funds were used for the broker's own purposes or for other clients. The later circular of September 26, 2016 was only relied upon in the course of penalty computation and did not govern the substantive finding of violation for the relevant period. The adjudicating authority had, therefore, proceeded on the correct legal basis and its conclusion that the appellant had misutilised client funds and failed to maintain the required segregation was supported by the record.

Conclusion: The challenge based on alleged retrospective application of the 2016 circular failed, and the finding of violation under the 1993 circular read with Regulation 26(xiii) was upheld.

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