The Securities and Exchange Board of India (Sebi) has asked Merrill Lynch to pay R60 lakh for a consent order on the stock market crash of May 17, 2004. The crash had occurred on the day the UPA-I government came to power as there was a huge pullout by a number of big entities.

But the Sebi order has not blamed the FII for the crash. ?The applicant without admitting or denying guilt has remitted a sum of R60 lakh towards settlement charges, in the matter,? the regulator said while passing the consent order.

The Sebi order was issued after Merrill Lynch Capital Market Espana failed to provide sufficient information about its clients after being asked by the regulator. The allegation is that the company did not comply with Sebi?s FII regulations and know your client (KYC) requirements.

This is the third time in the past several months that the regulator has taken a tough stand against large FIIs for violating its regulations. In January 2010, Sebi barred Society Generale (SG), a Sebi-registered FII, from issuing fresh offshore derivative instruments (ODI) or participatory notes. This was after the regulator found that SG had wrongly reported the end beneficiary in fourteen out of the forty five transactions in which it had issued ODI with Reliance Communication (RCom) as the underlying shares to Hythe Securities.

In December 2009, the regulator had prohibited Barclays Bank from issuing any fresh ODI for furnishing misleading data on ODI issued to overseas investors. According to Sebi regulations, all Foreign Institutional Investors (FIIs) are required to furnish details of name and location of the entity, the regulated status of the entity before the regulator while issuing ODIs. Further an FII has to strictly comply with know-your-client norms.

Merrill Lynch?s violation of regulatory norms came to light after the regulator initiated a probe into the dealings by various entities in the Indian market on May 17, 2004 following significant market movement. The regulator in its order noted that the majority of trades in the cash and F&O segment during May, 2004 were executed by Merrill Lynch Capital Markets on behalf of its clients, which were mostly hedge funds and also in their proprietary account.

During the course of its investigation, Sebi sought information about its major clients from Merrill Lynch regarding the names of the major shareholders, fund managers, directors, investors and limited partners.

It is alleged that Merrill Lynch failed to furnish complete details of the information even after repeated request from Sebi.

The regulator noted that the information with respect to certain institutional investors were furnished only after repeated follow ups, resulting in delay in investigation. ?The applicant cited reasons such as confidentiality provisions in the client agreement for their refusal to furnish the above said information,? said Sebi.

Subsequently, Sebi in February 2005 issued a notice to Merrill Lynch asking it to show cause as to why ?direction to prohibit the applicant from dealings in securities on behalf of its clients should not be issued against it.?

In May 2005, the regulator issued a second notice asking Merrill Lynch to show cause as to why appropriate recommendations should not be made against it for the same violations.