SEBI penalises Modex International Securities for client fund misuse

The Enforcement Action

The Securities and Exchange Board of India (SEBI) has passed a final order against the stock broker Modex International Securities Ltd (MISL) and one of its whole-time directors, finding that the firm misused client funds and securities and falsified its records to conceal the shortfall. The order, dated 21 August 2026 and carrying reference QJA/BS/MIRSD/MIRSD-SEC-5/32676/2026-27, was signed by the quasi-judicial authority at SEBI's Mumbai office.

SEBI imposed a monetary penalty of INR 7,00,000 on Modex International Securities Ltd (PAN AAACM2105K, SEBI registration INZ000211434) and an identical INR 7,00,000 on Mr Pavan Kumar Sachdeva, a whole-time director, taking the total to INR 14 lakh. The penalties are levied under Section 15HA of the SEBI Act, 1992 and Sections 23D and 23H of the Securities Contracts (Regulation) Act, 1956, payable within 45 days. Both were also continued under a restraint from accessing the securities market until investor claims are settled.

SEBI recorded that, according to the National Stock Exchange's forensic audit of the firm for the period 1 April 2017 to 24 January 2020, there was a shortfall of clients' securities of INR 95.29 crore across 288 scrips and a potential misappropriation of client funds of INR 136.29 crore. Proceedings against a second director named in the matter stand abated because he died in April 2021, before the show-cause notice was issued. During the proceedings the noticees denied the allegations, attributing the conduct to a system error and to individual directors; SEBI rejected those contentions on the material before it, holding that a company acts through its directors and cannot disown their conduct.

How the Scheme Worked

As the order describes it, Modex collected investments in the form of funds and securities from certain clients on the assurance of periodic returns. These clients were largely mapped to the firm's internal branch codes 'VD' and 'VD2' or bore client codes beginning with 'MX'. The order states that the firm deployed those assets in the futures and options (F&O) segment, and after incurring heavy losses, met its obligations and periodic payment commitments by selling securities belonging to other clients.

The scale of the losses is set out in the order, which records an approximate F&O loss of INR 185.91 crore across 986 non-proprietary client accounts. Per SEBI, the firm then made periodic payments totalling around INR 16.87 crore to 50 clients even though most of those accounts were themselves carrying F&O losses. SEBI found this amounted to running a business akin to that of an unregistered portfolio manager, which is beyond what a stock broker is permitted to do.

To mask the resulting deficit, the order finds, Modex made manual adjustments in its Register of Securities. SEBI noted manual margin adjustments aggregating INR 116.65 crore, recorded to artificially inflate the securities holdings of 16 client accounts before those securities were transferred to the cash market and sold, plus manual transfer adjustments of about INR 6 crore in the same accounts. The order records that in 118 client accounts there was a negative securities holding of INR 113.03 crore across 323 scrips, indicating that securities of some clients had been sold to meet the obligations of others.

On funds, SEBI found a shortfall of INR 79.61 crore in monies available with the firm as on 24 January 2020, and held that around INR 100.37 crore had been shifted from the cash settlement account to the F&O settlement account. The order states that client funds must remain segregated and cannot be used to meet obligations in another segment, and that a later purchase and sale of flats using an advance of INR 10.47 crore did not cure the diversion.

The procedural history stretches back years. NSE flagged falsified entries and conducted a forensic audit; SEBI passed an ex-parte interim order on 30 April 2020, confirmed it on 11 September 2020, and issued a show-cause notice on 5 July 2021. The matter was then held in abeyance after the firm was admitted into insolvency, until the National Company Law Tribunal recalled that admission on 12 June 2025 on the ground that a SEBI-registered broker is excluded from the Insolvency and Bankruptcy Code. A personal hearing followed on 18 June 2026, leading to this final order.

The Law Invoked

SEBI held that Modex violated Section 12A of the SEBI Act, 1992 read with Regulations 3(d), 4(1), 4(2)(f), 4(2)(m) and 4(2)(p) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003. These provisions prohibit fraudulent, manipulative and deceptive dealings in securities, including the misuse or diversion of client funds and securities held in a fiduciary capacity and the falsification of records.

The order also found violations of Section 12(1) of the SEBI Act read with Rule 8(1)(f) and Rule 8(3)(f) of the Securities Contracts (Regulation) Rules, 1957 and Regulations 3 and 14(1)(a) of the SEBI (Portfolio Managers) Regulations, 1993, which govern registration and bar a broker from carrying on other businesses. Record-keeping failures were held to breach Rule 15 of the SCRR read with Regulation 17 of the SEBI (Stock Brokers) Regulations, 1992, and the Code of Conduct in Schedule II read with Regulation 9, which requires integrity, due skill and fairness.

The director's liability was fixed under Section 27 of the SEBI Act, which deems a person in charge of and responsible for a company's business liable for its contraventions. SEBI concluded, on the preponderance of probabilities, that the whole-time director's position and 37.50 per cent shareholding attracted this provision.

What Happens Next

An order passed by SEBI can be appealed to the Securities Appellate Tribunal (SAT), and thereafter to the Supreme Court on a question of law. Unless a stay is granted, the penalties of INR 7,00,000 each are payable within 45 days of receipt of the order through SEBI's online payment facility. The findings recorded remain a regulator's determination that may be tested on appeal.

For affected clients, the order directs the NSE to act as the designated lead exchange, ascertain all dues, and return client funds and securities to the rightful clients in coordination with other market infrastructure institutions, banks and depositories. The firm was expelled as a trading member by the NSE from 15 September 2020 and by the BSE from 18 September 2020, and the order records that repayment of funds to clients is already underway. The assets of the firm and, to the permissible extent, of the director are to be used only towards settling those claims.

What It Means

The action is a reminder that the biggest broker-related risk for an ordinary investor is not market volatility but the misuse of assets that should never leave a client's own account. The order turns on a principle it repeats throughout: client funds and securities must stay segregated and cannot be deployed to fund a broker's own trading losses or promised returns. Any offer of assured or periodic returns from a broker is a warning sign, because a stock broker is not a portfolio manager and cannot lawfully guarantee returns.

Investors can check the same risk directly. Verify a broker's SEBI registration number and its standing on the SEBI, NSE and BSE websites, and look for any enforcement orders against it. Crucially, reconcile the holdings shown in your own demat account with the depository (NSDL or CDSL) consolidated statement, rather than relying only on the broker's statement, and act on any unexplained debit or transfer promptly. Where a broker defaults, the exchange-run claim and investor protection mechanisms, as invoked here through the NSE, are the route to recovery.

FAQ

Does this order mean those named have been convicted of a crime?

No. This is a SEBI regulatory finding under the SEBI Act and the Securities Contracts (Regulation) Act, not a criminal conviction. SEBI held, after a quasi-judicial proceeding, that securities laws were violated. The order is appealable to the Securities Appellate Tribunal, where any party may challenge the findings. It is a regulator's determination, subject to due process on appeal.

What exactly did SEBI order?

By its final order dated 21 August 2026, SEBI imposed a penalty of INR 7,00,000 each on Modex International Securities Ltd and whole-time director Mr Pavan Kumar Sachdeva, continued the restraint on both from the securities market until investor claims are settled, and named the NSE as lead exchange to return client funds and securities. Proceedings against a director who has died stand abated.

Can the order be appealed?

Yes. An order passed by SEBI can be appealed to the Securities Appellate Tribunal (SAT) within the prescribed period, and thereafter to the Supreme Court on a question of law. The penalty is payable within 45 days of receipt of the order unless a stay is obtained by the noticees.

How can I check if my broker is registered and in good standing?

Every SEBI-registered broker has a registration number (Modex held INZ000211434). Verify a broker on the SEBI website and the NSE and BSE member directories, and check for enforcement orders under the SEBI Enforcement section. Confirm that your funds and securities appear in your own demat account and reconcile broker statements against depository records regularly.

What should affected clients of Modex do now?

Per the order, the NSE is the designated lead exchange handling the settlement of claims for Modex clients and investors, in coordination with other market infrastructure institutions, banks and depositories. Affected clients should file or follow up their claims through the NSE's investor grievance and claim process, keeping records of their holdings and transactions ready.

Where can I read the official order?

The full final order is published on the SEBI website under Enforcement, Orders, dated August 2026, titled "Final Order in the matter of Modex International Securities Ltd." It carries reference QJA/BS/MIRSD/MIRSD-SEC-5/32676/2026-27 and is signed by the quasi-judicial authority at Mumbai on 21 August 2026.

This report is based on the official SEBI final order dated 21 August 2026 in the matter of Modex International Securities Ltd., published on the SEBI website.