Mandatory Direct Payout of Securities to Clients from October 14: SEBI

Introduction

The Securities and Exchange Board of India (SEBI) has made the process of payout of securities directly to the client account mandatory from October 14 through a circular issued on June 05, 2024. This change mandates the direct transfer of securities from clearing corporations to individual client Demat accounts.

Current Process of Payout of Securities

The current process involves an extra step where payout of securities by clearing corporations (CCs) was first made to the broker’s pool account before they are distributed to clients’ Demat accounts. The new system eliminates this intermediary step and securities are paid directly to client’s account, improving overall transaction efficiency.

In the earlier process, there was a risk that securities held by a broker could be misused if not properly segregated from the broker’s own assets. By payout of securities directly to client accounts, SEBI aims to minimize this risk and ensure that client holdings are clearly separated and protected.

Potential Shortages:

SEBI’s new regulation addresses potential shortfalls in client securities arising from internal position netting (offsetting buy and sell orders between clients) under margin trading. Clearing corporations (CCs) will implement a mechanism to identify these discrepancies. Any shortfalls will be resolved through an auction process established by the CCs, ensuring a transparent and efficient solution.

Importantly, clients will not incur any additional charges from their brokers for this process beyond the fees set by the CCs. This measure safeguards client assets and streamlines the handling of internal settlement issues.

Background and Development

SEBI actively consulted with relevant industry bodies like the Intermediary Advisory Committee, the Broker’s Industry Standards Forum, and concerned CCs and depositories before finalizing this regulation. The final implementation standards will be later formulated by the Broker’s Industry Standards Forum (on a pilot basis), under the aegis of the stock exchanges and in consultation with SEBI by August 5.

It is important to note that direct payout to client accounts was already an option facilitated by a previous SEBI circular dated February 01, 2001. However, it was implemented on a voluntary basis. This new regulation makes it mandatory for all brokers.

Conclusion

In the past few years, SEBI has been working on improving investor protection for funds. They’ve implemented a system where brokers must transfer client money to clearing corporations (CCs) in a safe way. This could involve cash, fixed deposit receipts, or special mutual fund units. This keeps investor money separate from the broker’s own assets.

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