SEBI draft circular for Enhancement of operational efficiency and Risk Reduction – Pay-out of securities directly to client demat account

The Securities and Exchange Board of India (SEBI), in its continuous efforts to safeguard investors’ interests and ensure the sanctity of the securities market, has proposed a draft circular for public commentary. This draft circular focuses on the mandatory payout of securities directly into client demat accounts, thereby bypassing the intermediary pool accounts traditionally used in the process.

The current system, where clearing corporations credit payouts to broker pool accounts, poses inherent risks. SEBI’s move to mandate direct payouts aims to address these risks by enhancing operational efficiency and minimizing the exposure of clients’ securities to potential misuse or mishandling. By streamlining the process and eliminating intermediaries, the proposed change seeks to establish a more secure and transparent mechanism for handling securities transactions.

The draft circular underscores SEBI’s commitment to ensuring the integrity of the securities market and protecting investors’ assets. It builds upon existing regulations, such as the Master Circular for Stock Brokers, which outline guidelines for the handling of clients’ securities during pay-in and pay-out processes. By making direct payout to client demat accounts mandatory, SEBI reinforces the segregation of client securities and reduces the vulnerability of these assets to any form of mismanagement or unauthorized use.

The decision to implement direct payout has not been made in haste. Extensive consultations have taken place with stakeholders, including stock exchanges, clearing corporations, and depositories. Industry representatives have been actively involved in discussions, ensuring that the proposed changes align with industry standards and best practices. This collaborative approach reflects SEBI’s commitment to fostering a regulatory framework that is both effective and responsive to market dynamics.

Key provisions of the draft circular include:

Direct crediting of securities to respective client demat accounts by clearing corporations.
Mechanisms for identifying unpaid securities and funded stocks under margin trading facilities.
Handling of shortages arising from interse netting of positions between clients through auction processes.

Exemption for clients with arrangements with SEBI-registered custodians for clearing and settlement.
To ensure smooth implementation, the circular outlines a schedule for compliance and directs market participants to take necessary steps to adapt to the new requirements. Stock exchanges, depositories, and clearing corporations are tasked with disseminating information, implementing necessary systems and procedures, and reporting on the progress of implementation to SEBI.