SEBI’s New Rules for Securities Payout: What You Need to Know

Starting October 14, the Securities and Exchange Board of India (SEBI) has introduced a new rule to enhance the safety of investors’ securities. The rule mandates that securities payouts be made directly to the client’s account. This change aims to protect clients’ securities and ensure that stock brokers keep client securities separate, preventing misuse.

Current Process

At present, when securities are paid out, they are first pooled by the broker before being credited to the respective client demat accounts. This pooling can sometimes lead to the misuse of securities, as they are not immediately transferred to the client.

New Process

Under the new rules, the securities will be credited directly to the client’s demat account by the clearing corporations (CCs). This direct payout system removes the intermediary step involving brokers and aims to safeguard investors’ assets.

Handling Unpaid and Funded Securities

Clearing corporations will set up a mechanism to identify unpaid securities and those under margin trading facilities. If there are any shortages due to netting of positions between clients (internal shortages), trading members will handle these through an auction process specified by the CCs. Brokers are not allowed to charge clients any additional fees beyond those levied by the CCs.

Consultation and Implementation

The new rule was discussed extensively with various stakeholders, including the Intermediary Advisory Committee, the Broker’s Industry Standards Forum, stock exchanges, CCs, and depositories. The Broker’s Industry Standards Forum, in consultation with SEBI, will formulate the implementation standards on a pilot basis by August 5.

Voluntary Direct Payouts

It’s worth noting that direct payouts to client accounts were already facilitated on a voluntary basis since a SEBI circular dated February 1, 2001. However, making it mandatory now strengthens investor protection.

Past Initiatives by SEBI

In recent years, SEBI has taken multiple steps to protect investors’ securities and funds. For example, SEBI introduced upstreaming and downstreaming mechanisms for client funds. This means that all client funds received by stock brokers and clearing members must be transferred to CCs in the form of cash, fixed deposit receipts with a lien, or a pledge of mutual fund overnight scheme units.

Conclusion

SEBI’s new mandatory direct payout rule is a significant step towards enhancing investor protection. By ensuring that securities are credited directly to client accounts, SEBI aims to prevent misuse and provide greater security for investors’ assets.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.