The market regulator, the Securities and Exchange Board of India, on Wednesday suggested changing the margin pledge system in a way that misuse of client funds by the brokers can be prevented.
"Hence, in a move to mitigate the risk of misuse of clients' securities, it is being proposed to block the securities for early pay-in in clients demat accounts upon invocation," the SEBI consultation paper read.
Currently, when brokers invoke pledged client securities, they do not always sell them immediately. This leads to an accumulation of client securities in brokers' demat accounts, increasing the risk of misappropriation.
In order to fight this phenomenon, SEBI has suggested blocking these securities for early pay-in immediately upon invocation. This means that once a broker invokes pledged securities, they will be directly blocked in the client's demat account for early pay-in, reducing the chances of misuse.
Additionally, SEBI has called for simplifying the process when clients sell pledged securities.
The suggestion paper on the SEBI website also mentions that a representation was received from the Brokers' Industry Standards Forum regarding the operational difficulties faced by brokers in the process wherein clients sell the pledged securities on their own.
Instead of the current two-step process—where brokers first unpledge the securities and then deliver them—SEBI wants to introduce a single instruction called “Pledge release for early pay-in.” This will ensure that the pledge is released and an early pay-in block is set up automatically in the client's demat account.
The proposals are open for public consultation till March 4, 2025.
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