The Securities and Exchange Board of India (SEBI) has overhauled the framework governing unpaid client securities, introducing a time-bound mechanism that allows stock brokers to recover outstanding dues while ensuring investors regain full control over their shares if brokers fail to act within prescribed timelines.
The revised framework, which takes into account the prevailing practice of direct credit of securities to clients' demat accounts, replaces provisions introduced in 2019 and subsequently amended in 2022. SEBI said the changes follow representations from the Brokers' Industry Standards Forum (ISF), which sought revisions to address operational issues and align the rules with the current regulatory environment.
Under the revised norms, securities purchased by a client but remaining unpaid will continue to be credited directly to the client's demat account. However, they will automatically be pledged in favour of a separate Client Unpaid Securities Pledgee Account (CUSPA) maintained by the broker.
The pledge will be created without requiring any specific instruction from the client, and brokers must immediately inform clients through email or SMS about the outstanding payment obligation and the possibility of sale if dues remain unpaid.
SEBI has also made it mandatory for brokers to frame a publicly disclosed policy explaining how unpaid securities will be handled. The policy must clearly specify when pledges will be invoked, released or securities liquidated, while giving clients up to five trading days from the payout date to clear their dues.
Although these pledged securities can be considered for margin reporting purposes, brokers cannot extend fresh trading exposure against them.
The regulator has also introduced daily monitoring requirements. Brokers must continuously assess how much of a client's securities need to remain under pledge based on the client's ledger balance, margin obligations and other factors prescribed by stock exchanges. Any excess pledge must be released by the next trading day.
If the client fails to pay within the specified timeline, the broker may invoke the pledge after giving reasonable notice and sell the securities in the market using the client's Unique Client Code (UCC). Any surplus remaining after adjusting the client's dues must be credited back to the client's ledger.
One of the key investor protection measures is the automatic release provision. If the broker neither invokes nor releases the pledge within five trading days after payout, the depository will automatically remove the pledge at the end of the sixth trading day, restoring the securities as free holdings in the client's demat account. The pledged securities also cannot be further pledged or transferred by brokers to banks or NBFCs to raise funds.
SEBI has, however, allowed limited flexibility in exceptional situations such as lower circuits with only sellers, trading suspensions or other unforeseen circumstances. In such cases, brokers may seek a one-week extension of the pledge by applying before 6 pm on the fifth trading day. Further extensions will be permitted only if the exceptional conditions continue. Clients must be informed each time an extension is granted.
SEBI has directed stock exchanges to issue operational guidelines in consultation with depositories within 30 days. The regulator said the main provisions, including the auto-pledge and auto-release mechanism, will come into effect three months after the operational guidelines are issued. The provisions relating to the extension of pledges in exceptional circumstances will take effect six months from the date of the circular.
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