SEBI’s new rule of settling unused funds results in tightening the account settlement process

A new rule has emerged in India’s stock markets. According to the law, the brokers should transfer unused funds back to the client’s accounts at least once each quarter. The decision has revealed a significant mismatch of funds.

The accounts settlement process has been made mandatory by the SEBI, the market regulator, and the decision was brought into account on October 7, the first Friday of the current quarter.

Sources have revealed that the brokers withdrew anywhere near 16,500 crore INR and 20,000 crore INR for the clearing corporations of the stock exchanges, but the actual amount that they paid to the clients was estimated to be around 25,000 crores to 30,000 crore INR during the exercise.

The sources have pointed out certain doubts regarding the mismatch. They started talking that some larger brokers were not depositing the entire client money with the CCs but instead were preserving some of the amounts as a liquid float.

Due to the disputes of the broker defaults in the last few years and the case involving Karvy Broking’s misuse of client collateral, SEBI is against the brokers’ decision to collect excess collateral from the clients. It is believed that the decision was taken to prevent the misuse of the funds. 

In July, SEBI opened up, mentioning that they have devised a new framework to mitigate the risk of misuse of client funds.


As a result, SEBI has directed brokers to separate the money of each client and not put it in a pool account, which started in February.

Sources have said that there are few brokers who need to comply with the rules mandated by the SEBI. 

The rule states that starting from October 7, every first Friday of the month, all the brokerages must transfer the unused funds back to the customer’s bank accounts as part of the new decision. 

Nitin Kamath has stated that the collection would account for more than 25000 crore INR in India, and the concept is completely new to the nation. 

The founder of Zerodha as further stated that brokers, including banks in most countries, can hold unused funds for a lifetime and can utilize it as working capital requirements.

However, the rule is not the same. The funds can only be utilized for customers’ trade after all the regulatory changes. It would be impacted broker income from a float.

Another regulatory official has pointed out that the mismatch could lead to further tightening of the regulations by the SEBI to prevent the broker from handling the client’s money. 

However, another retail broker has stated that the mismatch could be mainly because the brokers have started to return the client’s money before Friday, and hence, the funds may not have been deposited with the CCs.

The scope for malpractices has diminished as the brokers have started reporting on the client’s collateral daily.

The settlement process took place smoothly last Friday, but the brokers fear that they have certain issues to manage.

The risks included operational risks of sending large amounts in one single day, the need for higher working capital, especially on Monday following Friday’s settlement process on float income, etc. In addition, the payment gateways tend to settle funds with the brokers on a today-plus-one basis.

So, if the brokers allow the clients to instantly trade funds that can be transferred using a payment gateway, the broker’s capital is blocked.

The new decision devised by SEBI has caused a lot of buzz on the social media platform. Many people were complaining about the delayed credit of the funds in their bank accounts, which led them to miss out on significant market trading opportunities.

Some stock investors and traders have complained o social media that despite the fund’s refund initiation taking place from the broker’s end on Friday, the money was credited on Monday after 3 pm. 

As a result, they missed out on trading opportunities.

The fund transfer process is a complex one since there are a lot of intermediaries involved in the process, including payment gateways, banks, and trading accounts. The delayed process could be attributed to the long refund process.

What is the reason for the SEBI’s new regulation?

SEBI has come out with a new regulation in the existing running account settlement procedure to prevent stockbrokers from misutilising the client’s funds for other purposes apart from what was originally intended by the client.

There have been past cases in India where stockbrokers traded in the future and options using the client’s funds.

Edited by Prakriti Arora

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