Securities and Exchange Board of India (SEBI) mandates direct transfer of securities to clients’ demat accounts from Oct 14, 2024

Market regulator Securities and Exchange Board of India (SEBI) has directed the clearing corporations to directly transfer the securities into the clients’ demat accounts. This will become effective from October 14, 2024, SEBI said in a circular.

The move to directly transfer the securities into the clients’ Demat accounts is initiated to improve the operational efficiency and mitigating the risks to clients’ securities.

The mandate was declared in the circular titled “"Enhancement of operational efficiency and Risk Reduction--Payout of securities directly to client demat account", by SEBI on June 5.

"This is to protect clients’ securities and to ensure that the stock broker segregates securities of the client or clients so that they are not vulnerable to misuse," the circular mentioned.

Currently, the clearing corporations transfer the securities to the pool account of the broker, who subsequently transfers the same into the respective client’s Demat accounts.

"The matter related to the funds of the clients has been addressed through upstreaming and downstreaming of funds mechanism. The matter related to flow of securities also needs to be addressed for the payout of securities," read the circular.

Although this facility of direct transfer was in place on a voluntary basis from February 1, 2001, it has now become mandatory.

Once the guidelines become fully operational, the clearing corporations (CCs) will have to provide a system for trading members (TMs) to identify unpaid securities and funded stocks under the margin trading facility.

The Master Circular issued to the stock brokers on May 22, 2024 has been amended to improve the framework. The new amendments allow for the creation of a separate demat account for holding stocks bought with margin trading facilities and the establishment of an auto-pledge system.

Here is an excerpt of the amended text: “Funded stocks held by the TM / CM under the margin trading facility shall be held by the TM / CM only by way of pledge. For this purpose, the TM / CM shall be required to open a separate demat account tagged ‘Client Securities under Margin Funding Account’ in which only funded stocks in respect of margin funding shall be kept/ transferred, and no other transactions shall be permitted. Such funded stocks shall be transferred to respective client’s demat account followed by creation of an auto-pledge (i.e., without the requirement of a specific instruction from the client) with suitable reason, in favour of ‘Client Securities under Margin Funding Account’.”

The SEBI guidelines also outline how to deal with shortages resulting from netting inter-se positions between clients.

In such cases, the trading or clearing member must address the shortages through an auction as directed by the CCs. Brokers are not permitted to charge the client anything beyond what the CCs have specified.