Sebi mandates direct transfer of securities to client's demat account

This has to been done to ensure that clients' securities are not misused.

Securities will now have to be directly transferred to the clients' demat accounts by the clearing corporations, stated the guidelines issued by the market regulator.

On June 5, the Securities and Exchange Board of India (Sebi) issued a circular titled "Enhancement of operational efficieny and Risk Reduction--Pay out of securities directly to client demat account". It will come into effect from October 14, 2024.

It stated, "This is to protect clients’ securities and to ensure that the stock broker segregates securities of the client or clients so that they are not vulnerable to misuse."

Currently, the broker securities received in payout are pooled by the broker and then credited to the respective client demat accounts.

Also read: Brokers breathe a sigh of relief as SEBI relaxes client fund rules

As the circular stated, "The matter related to the funds of the clients has been addressed through upstreaming and downstreaming of funds mechanism. The matter related to flow of securities also needs to be addressed for the payout of securities."

This facility of direct transfer was already available on a voluntary basis from February 1, 2001. This has now been made mandatory.

Once the guidelines are operational, CCs will  have to provide a mechanism for Trading Member(TM)/Clearing Members (CM) to identify the unpaid securities and funded stocks under the margin trading facility.

To enhance the framework, the Master Circular issued to the Stock Brokers on May 22, 2024, has been amended to allow for the creation of a separate demat account to hold stocks that were bought with margin trading facility and for the creation of an auto-pledge.

The amended text reads as follows:

“41.9. Funded stocks held by the TM / CM under the margin trading facility shall be held by the TM / CM only by way of pledge. For this purpose, the TM / CM shall be required to open a separate demat account tagged ‘Client Securities under Margin Funding Account’ in which only funded stocks in respect of margin funding shall be kept/ transferred, and no other transactions shall be permitted. Such funded stocks shall be transferred to respective client’s demat account followed by creation of an auto-pledge (i.e., without the requirement of a specific instruction from the client) with suitable reason, in favor of ‘Client Securities under Margin Funding Account’.”

The guidelines also specify how to handle shortages from netting of inter-se positions between clients.

When this happens, the trading member or clearing member will need to handle such shortages through an auction as specified by the CCs. In such instances, the brokers will not be allowed to levy any charge on the client over and above what has been levied by the CCs.