𝐌𝐚𝐧𝐝𝐚𝐭𝐨𝐫𝐲 𝐃𝐢𝐫𝐞𝐜𝐭 𝐏𝐚𝐲𝐨𝐮𝐭: 𝐀 𝐬𝐢𝐠𝐧𝐢𝐟𝐢𝐜𝐚𝐧𝐭 𝐜𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐭𝐡𝐞 𝐒𝐞𝐭𝐭𝐥𝐞𝐦𝐞𝐧𝐭 𝐩𝐫𝐨𝐜𝐞𝐬𝐬

In a pivotal move, SEBI has issued a consultation paper proposing a significant change in the securities settlement process by mandating direct pay out of securities to the client’s account.

Settlement pay-out involves two essential processes: (i) Securities Pay-out, wherein securities are received to complete the securities settlement of a purchase transaction, and (ii) Funds Pay-out, which entails the transfer of funds to complete the funds settlement of a sale transaction.

The Clearing Corporation (CC) (such as India Clearing Corporation Ltd, NSE Clearing Limited, MULTI COMMODITY EXCHANGE CLEARING CORPORATION LIMITED, National Commodity Clearing Limited, AMC REPO CLEARING LIMITED (ARCL)) acting as the counterparty to all trades in the stock exchange, plays a crucial role in ensuring the pay-out of funds or securities to complete settlement.

𝐁𝐚𝐜𝐤𝐠𝐫𝐨𝐮𝐧𝐝

Presently, payout from clearing corporations goes into the a pool maintained by the broker and thereafter to the client. While since 2001, the option for direct payout to client demat accounts has existed on a voluntary basis, SEBI has not proposed to make this voluntary measure a mandatory requirement.

𝐊𝐞𝐲 𝐏𝐫𝐨𝐯𝐢𝐬𝐢𝐨𝐧𝐬 𝐨𝐟 𝐭𝐡𝐞 𝐃𝐫𝐚𝐟𝐭 𝐂𝐢𝐫𝐜𝐮𝐥𝐚𝐫

SEBI’s draft circular outlines several key provisions to streamline the process:

1. 𝐃𝐢𝐫𝐞𝐜𝐭 𝐏𝐚𝐲𝐨𝐮𝐭: Under the draft circular, CCs will be required to credit securities directly to the respective client’s demat account. This eliminates the intermediary step of pooling securities in the broker’s account before crediting them to clients.

2. 𝐌𝐞𝐜𝐡𝐚𝐧𝐢𝐬𝐦 𝐟𝐨𝐫 𝐈𝐝𝐞𝐧𝐭𝐢𝐟𝐢𝐜𝐚𝐭𝐢𝐨𝐧: CCs will provide Trading Members (TMs) and Clearing Members (CMs) with a mechanism to identify unpaid securities and funded stocks, particularly under the margin trading facility.

3. 𝐒𝐞𝐠𝐫𝐞𝐠𝐚𝐭𝐢𝐨𝐧 𝐨𝐟 𝐅𝐮𝐧𝐝𝐞𝐝 𝐒𝐭𝐨𝐜𝐤𝐬: Brokers holding funded stocks under the margin trading facility must segregate them in a separate demat account and pledge them accordingly. This ensures adherence to regulatory requirements and mitigates risk.

4. 𝐇𝐚𝐧𝐝𝐥𝐢𝐧𝐠 𝐨𝐟 𝐒𝐡𝐨𝐫𝐭𝐚𝐠𝐞𝐬: In cases of internal shortages arising from inter- se netting of positions between clients, TM/CM will handle shortages through an auction process specified by CCs. Brokers are prohibited from levying charges on clients beyond those mandated by CCs.

SEBI’s move to mandate direct payout of securities to client demat accounts marks a significant step towards enhancing investor protection and operational efficiency in the securities market.

A copy of the Draft Circular is enclosed hereinbelow.

Readers are welcome to send their views to Regstreet Law Advisors at info@regstreetlaw.com.