SEBI’s New Directive on Direct Pay-out of Securities

The Securities and Exchange Board of India (SEBI) issued a circular aimed at improving the operational efficiency and reducing risks associated with the pay-out of securities in the Indian financial markets. This circular mandates the direct pay-out of securities to clients’ demat accounts, replacing the current system where securities are pooled by brokers before being credited to clients.

SEBI’s previous voluntary circular dated February 1, 2001, facilitated direct pay-out to client accounts, but it wasn’t mandatory. Recognizing the need for a more secure and efficient process, SEBI has now made this practice compulsory. Key Changes Introduced by the Circular includes:

Direct Pay-out to Client Demat Accounts
Starting October 14, 2024, Clearing Corporations (CCs) will be required to credit securities directly to clients’ demat accounts. This change aims to minimize the risk of misuse of clients’ securities by brokers and enhance the overall transparency of transactions.

Exclusions and Implementation Timeline
The new processes will not apply to clients who have arrangements with SEBI-registered custodians for the clearing and settlement of trades.

Implementation Schedule and Compliance
The circular’s provisions will take effect from October 14, 2024. The implementation standards will be formulated by the Broker’s Industry Standards Forum, under the aegis of the stock exchanges and in consultation with SEBI, by August 5, 2024.

Stock Exchanges, Depositories, and CCs are instructed to ensure compliance with the circular’s provisions and to amend relevant Bye-laws, Rules, and Regulations accordingly. These entities must also report the status of implementation in their Monthly Development Reports to SEBI.

Implications for Market Participants For Clients
The direct pay-out mechanism ensures that clients’ securities are securely and promptly credited to their demat accounts, reducing the risk of misuse by brokers. This enhances trust and confidence among investors, promoting a more secure investment environment.

For Brokers and Clearing Members
Brokers and CMs will need to adjust their operational processes to comply with the new requirements. This includes setting up new demat accounts for margin-funded stocks and ensuring adherence to the auction process for handling shortages. While this may introduce some initial administrative burdens, it ultimately streamlines operations and enhances transparency.

For the Market
The mandatory direct pay-out of securities represents a significant step towards increasing the efficiency and security of securities transactions in the Indian market. By reducing the risk of misuse of clients’ securities and ensuring timely crediting to demat accounts, SEBI aims to foster a more robust and trustworthy financial ecosystem.