Securities and Exchange Board of India (SEBI) released a circular introducing key changes in the process of margin obligations via pledge and re-pledge within the depository system. These changes mark a significant step in making the securities market more streamlined and investor-friendly while addressing operational issues faced by brokers.
Background
SEBI had earlier mandated that brokers could accept collateral from clients only through a margin pledge mechanism, as per its circular dated February 25, 2020, and further reiterated in paragraph 41 of the Master Circular for Stock Brokers issued on August 9, 2024. This pledge mechanism aimed to ensure transparency, traceability, and protection of client securities.
However, SEBI observed that after brokers invoked securities pledged by clients—typically due to margin shortfalls or defaults—these securities often remained unsold in the brokers’ demat accounts. This defeated the core purpose of invocation, which is to realize the value of the collateral to recover dues. Furthermore, brokers reported operational challenges when clients sold pledged securities, as the process required multiple steps including un-pledging, and then issuing physical or digital delivery instructions.
What’s Changing?
To address these inefficiencies, SEBI has introduced an automated combined process for both invocation and sale of securities. This change, prompted by inputs from the Brokers’ Industry Standard Forum (Brokers’ ISF), is designed to simplify the operational workflow and enhance investor safety.
Key amendments include:
- Pledge Release for Early Pay-In
When a client sells securities that are pledged (including under margin funding or CUSPA), the depository will now offer a single instruction mechanism. This will
- Automatically release the pledge.
- Simultaneously set up an early pay-in block in the client’s demat account.
- Ensure that only the portion matching the delivery obligation is processed, as validated by the clearing corporations (CCs).
- This eliminates the need for brokers to manually initiate un-pledging or rely on POA/DDPI, making the process smoother and less error-prone.
Invocation and Early Pay-In Block
When brokers invoke client securities, those securities (excluding mutual funds not traded on exchanges) will be blocked for early pay-in directly in the client’s demat account. Additionally:
- A traceable record of the invoked shares will be maintained in the broker’s designated demat account.
- Only the portion of securities that match the client’s delivery obligations will be considered valid, based on data provided by the CC.
