SEBI Notification on Enhancement of Operational Efficiency and Risk Reduction – Pay Out of Securities Directly to Client Demat Account

Introduction

The Securities and Exchange Board of India, vide its circular dated 5th June, 2024 has directed enhancement of operational efficiency and risk reduction along with pay – out of securities directly to client demat account. Coming into effect from October 14, 2024 the circular has laid down that the implementation standards shall be formulated by the Broker’s Industry Standards Forum on a pilot basis under the aegis of the local stock exchanges and in consultation with the Securities and Exchange Corporation of India.

Additionally, various other provisions pertaining to securities market have also come into effect such as directing the Securities Exchanges and Depositories to bring the provisions of the circular to the notice of their members and participants along with disseminating the same on their websites, putting into place an appropriate system and procedure for ensuring compliance of the provisions as laid down by the circular, making necessary amendments to the concerned bye – laws, rules and regulations and other mechanisms for the implementation of the above decision and submitting a monthly report to the SEBI regarding the status of implementation of these directions.

The circular has also laid down guidelines for the brokers to not levy extra/additional charges on the clients for shortages and has also outlined the measures for handling internal shortages and funded stocks under the margin trading framework. Under the current system of direct transfers which was already available on voluntary basis from February 2001, securities that have been received in pay – outs are pooled by the brokers before they are credited to their client’s respective demat accounts. However, under the new directive, the securities are transferred directly to the client’s demat accounts which would further enhance transparency and reduce the risk of manhandling the funds and securities.

Conclusion

The present circular of the Securities and Exchange Board of India represents a comprehensive effort towards enhancing the security and efficiency of the operations of stock market. Mandating the direct transfer of securities to the demat accounts of the clients, ensuring better protection of client’s assets through prevention of pooling and potential misuse of securities, the circular also depicts an initiative by the security market regulators towards safeguarding the interests of the investors, promoting transparency and enhancing investor confidence in the securities market.

Vide another circular dated 22nd May, 2024; instructions were issued to stock – brokers to permit creation of a new demat account for holding of stocks purchased through ‘margin trading facility’. However, the present circular[1] has also updated it by allowing creation of an auto – pledge system.

[1] https://www.sebi.gov.in/legal/circulars/jun-2024/enhancement-of-operational-efficiency-and-risk-reduction-pay-out-of-securities-directly-to-client-demat-account_83930.html