SEBI has long prioritized investor protection and the smooth functioning of the securities market. On May 22, 2024, SEBI issued a comprehensive directive for Stock Brokers, aimed at safeguarding clients' securities and ensuring their separation from broker-owned assets to prevent misuse. While it addressed the handling of clients' funds, attention was also drawn to the flow of securities during payouts, a process prone to risks and inefficiencies due to brokers pooling received securities before crediting them to respective client demat accounts.
Compulsory direct payout mechanism
On June 5, 2024, SEBI issued a new circular (SEBI/HO/MIRSD/MIRSDPoD1/P/CIR/2024/75) making it mandatory for Clearing Corporations (CCs) to directly transfer securities to client demat accounts. This replaces the previous voluntary arrangement and eliminates the practice of brokers pooling securities before crediting them to client accounts. Additionally, CCs must facilitate a method for Trading Members (TM) or Clearing Members (CM) to distinguish unpaid securities and funded stocks under margin trading.
Advantages of the direct payout mechanism
The prior practice of pooling securities posed various risks, including misuse, counterparty risk, and lack of transparency. By mandating direct payouts to client demat accounts, SEBI effectively mitigates these risks. Direct payout ensures that client securities are directly credited, eliminating the risk of misuse. It also grants clients visibility and control over their securities, bolstering trust in the brokerage system.
Implementation timeline
The new circular takes effect on October 14, 2024. The Broker's Industry Standards Forum must establish implementation standards by August 5, 2024. Stock Exchanges, Depositories, and Clearing Corporations are responsible for ensuring compliance and communicating their implementation status to SEBI.
Segregated demat accounts for funded stocks under margin trading
The circular introduces an amendment to the 'Master Circular for Stock Brokers,' requiring funded stocks under margin trading to be held via pledge in a separate demat account labeled 'Client Securities under Margin Funding Account.' This account exclusively holds funded stocks for margin funding, with no other transactions permitted. Subsequently, these stocks are transferred to the client's demat account and auto-pledged in favor of the 'Client Securities under Margin Funding Account.'
Management of internal shortages and broker charges
Provisions are outlined for addressing internal shortages resulting from position netting between clients, managed by TMs and CMs through specified auction processes by Clearing Corporations. Brokers are prohibited from imposing additional charges beyond those set by Clearing Corporations. Clients with arrangements with SEBI-registered custodians for clearing and settlement are exempt from these provisions.
Conclusion
SEBI's directive mandating direct transfer of securities to clients' demat accounts signifies a substantial stride in investor protection and market transparency. By abolishing the practice of pooling securities, SEBI diminishes risks such as commingling of assets, broker financial instability, and client information opacity. This regulatory change underscores SEBI's dedication to upholding secure and efficient financial markets in India. Brokers must comply with these regulations by October 14, 2024, ensuring the protection of investors' interests amidst these reforms.
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