SEBI Streamlines Process To Handle Clients' Unpaid Securities By Trading, Clearing Members

All securities received in pay-out would be transferred to demat account of respective clients directly within one working day.

<div class="paragraphs"><p>SEBI building in Mumbai. (Photo: Shailesh Andrade/Reuters)</p></div>
SEBI building in Mumbai. (Photo: Shailesh Andrade/Reuters)

Capital markets regulator SEBI on Friday came out with a new framework to further streamline the process of handling of unpaid securities by trading or clearing members as well as to prevent misuse of such securities.

Under the framework, all the securities received in pay-out would be transferred to the demat account of the respective clients directly from the pool account of the trading member or clearing member within one working day of the pay-out, SEBI said in a circular.

With regard to the unpaid securities—the securities that have not been paid for in full by the clients—SEBI said that such securities will be transferred to respective client's demat account followed by creation of an auto-pledge (without any specific instruction from the client) with the reason "unpaid" in favour of a separate account titled "client unpaid securities pledgee account", which would be opened by TM/CM.

After the creation of pledge, a communication—email or SMS—would be sent by TM/CM informing the client about their funds obligation and also about their right to sell such securities in case of failure by a client to fulfill their obligation.

If the client fulfills its funds obligation within five trading days after the payout, the TM/CM would release the pledge so that the securities are available to the client as free balance, and in case the client fails to fulfill its funds obligation, the TM or CM would dispose off such unpaid securities in the market within five trading days after the payout.

TM/CM, before disposing the securities, would be required to give an intimation through an email or SMS to the client, one trading day before such sale.

The unpaid securities would be sold in the market with the Unique Client Code of the respective client. Profit or loss on the sale transaction of the unpaid securities, if any, would be adjusted from the respective client account.

"TM/CM shall invoke the pledge only against the delivery obligation of the client. On invocation, the securities shall be blocked for early pay-in in the client's demat account with a trail being maintained in the TM/CM's client unpaid securities pledgee account," SEBI said.

Once such securities are blocked for early pay-in in client's demat account, the depositories would verify the block details against the client level obligation.

In case such pledge is neither invoked nor released within seven trading days after the payout, the pledge on securities would be auto-released and the securities would be available to the client as free balance without encumbrance. Such unpaid securities pledged in the client's account would not be considered for the margin obligations of the client.

All the existing "client unpaid securities accounts" would be wound up by April 15, 2023. The securities lying in such accounts would either be disposed of in the market or be transferred to the client's demat account by the TM/CM accordingly, failing which such accounts would be frozen for debit and credit.

The new framework, framed after extensive consultations with exchanges, depositories and clearing corporations, would come into effect from March 31, 2023, the Securities and Exchange Board of India said.

Pay-in, in market parlance, refers to the process when investors sell their shares, the broker collects those shares from their demat account. After this, these shares are transferred to the bourse and clearing corporation. In the payout process, investors purchase the stocks, the clearing member transfers them to the broker who in turn transfers these shares to the demat account.

In order to protect clients' funds and securities and to ensure that the stock broker segregates securities or money of the client and does not use them for self or for any other client, SEBI has brought out various guidelines from time to time.