SEBI Revises Framework For Handling Clients' Unpaid Securities

The Securities and Exchange Board of India (SEBI) has revised the framework governing the treatment of clients' unpaid securities by trading members. The changes, announced on 3 July, will address the operational challenges faced by brokers. Further, the revised framework aims to improve the ease of doing business for trading members while enhancing the investing experience for clients.

Securities To Be Automatically Pledged

Under the revised framework, unpaid securities purchased outside the Margin Trading Facility (MTF) will continue to be credited directly to the client's demat account.

However, these securities will be automatically pledged in favour of a separate Client Unpaid Securities Pledgee Account (CUSPA) maintained by the trading member. This pledge will be created without requiring any additional instruction from the client.

Brokers Must Notify Clients

Trading members will be required to inform clients about their outstanding payment obligations and the possibility that unpaid securities may be sold if dues are not cleared within the prescribed period.

SEBI has asked brokers to maintain a formal policy covering the procedure, timeline and conditions for pledge invocation, release and liquidation.

Five-Day Payment Window

The policy must provide clients with a maximum of 5 trading days from the securities payout date to fulfil their payment obligations. If payment is not received within this period, the trading member may invoke the pledge. The unpaid securities may then be liquidated after the notice is given to the client. Any remaining amount after settling the client's outstanding dues must be credited to the client's ledger.

Automatic Release Of Pledged Securities

SEBI has introduced an automatic release mechanism to prevent unnecessary retention of pledged securities. If a pledge is neither invoked nor released within five trading days after the payout, depositories will automatically release it at the end of the sixth trading day.

Trading members may also request an earlier release of the pledge before the automatic release is triggered.

Restrictions On Further Pledging

The regulator has clarified that securities pledged under a trading member's CUSPA cannot be repledged or transferred to banks or non-banking financial companies (NBFCs) for raising funds.

Extension Allowed in Exceptional Cases

The revised framework permits trading members to seek a one-time extension of the pledge for up to one additional calendar week under exceptional circumstances.

Such situations may include lower circuit restrictions, trading suspensions or other valid reasons recognised by market infrastructure institutions. Clients must be informed whenever an extension is granted.

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Implementation Timeline

Stock exchanges have been instructed to issue operational guidelines for implementing the revised framework within 30 days, in consultation with depositories.

The updated pledge framework will come into force three months after these operational guidelines are issued. Meanwhile, the provisions relating to pledge extensions will become effective six months from the date of SEBI's circular.