The Securities and Exchange Board of India (Sebi) has issued a new circular to strengthen the unpaid securities process further.
Sebi has instructed all trading and clearing members (TM/CM) to create an "auto pledge" on unpaid securities.
"Unpaid securities (not been paid for in full by the clients) shall be transferred to the respective client's Demat account, followed by the creation of an auto-pledge with the reason 'unpaid,' in favor of a separate account titled – 'client unpaid securities pledge account", which shall be opened by TM/CM," the circular reads.
In its previous circular, Sebi had directed brokers to open separate client accounts for unpaid securities. "Securities not been paid for in full by the clients, a separate client account titled – "client unpaid securities account" shall be opened by the TM/CM. Unpaid securities shall be transferred to 'client unpaid securities account' from the pool account of the concerned TM/CM," the earlier circular said.
It instructed that if clients failed to fulfil the obligation, the brokers would sell unpaid shares , and profit or loss would be adjusted from the respective client account.
Sebi said trading members and clearing members should invoke the pledge only against the delivery obligation of the client. On invocation, the securities shall be blocked for early pay in the clients' Demat account .
A trail of such transactions must be maintained in the "client unpaid securities pledge account" by trading and clearing members.
Once such securities are blocked for early pay-in in the clients' Demat account, the depositories must verify the block details against the client-level obligations.
Securities Will Be Freed If Pledge Is Not invoked Within 7 Days: Sebi said if a pledge is neither invoked nor released within seven trading days after the pay-out date, the pledge on securities will be auto-released, and the securities shall be made available to their respective clients' balance without encumbrance.
Unpaid Securities Cannot Be Used For Margin Obligations: Sebi said securities pledged in a client's account shall not be considered for margin obligations of clients. Besides, Sebi said all the existing client unpaid securities accounts should be wound up before April 15, 2023, and the securities lying in such accounts shall either be disposed of in the market or be transferred to the clients' Demat account by the trading member and clearing member. If they fail to do so, then such respective accounts shall be frozen for debit and credit.
All the provisions and amended regulations, which Sebi mentioned in the circular dated November 11, will come into effect from March 2023.