Sebi puts in place framework to prevent misuse of clients’ securities by brokers

Capital markets regulator Sebi on Monday put in place a new framework which will prevent misuse of clients’ securities and funds by their stock brokers.

Under the framework, depositories need to validate the transfer instruction for pay-in of securities from client demat accounts to trading member pool accounts against obligations received from the clearing corporations.

This should be done prior to executing actual transfer of the securities for pay-in from client demat account to trading member (TM) pool account, the Securities and Exchange Board of India (Sebi) said in a circular.

The framework, applicable from November 25, is aimed at further mitigating the risk for clients’ securities, especially those given towards delivery/settlement obligations.

“Depositories, prior to executing actual transfer of the securities for pay-in from client demat account to TM Pool account, shall validate the transfer instruction received through any of the available channels for the purpose of pay-in, i.e. either initiated by clients themselves or by the Power of Attorney (POA) / Demat Debit and Pledge Instruction (DDPI) holder against the client-wise net delivery obligation received from CCs,” Sebi said.

For early pay-in transactions, the existing facility of block mechanism will continue.

Under the pay-in of securities, shares that the client wants to offload are picked up from their demat account and transferred to the broker’s account and all these shares are then delivered to the clearing corporation (CC).

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In the case of pay-out of securities, shares that the client wants to purchased are received from the clearing corporation and then transferred to the broker’s account. This is reflected in the client’s demat account.

In order to validate the pay-in instructions, a process needs to be put in place by the depositories.

Under the process, depositories receive the debit instruction for the purpose of pay-in, given either by the client himself using the depository’s online system or eDIS mandate or through depository participant based on physical DIS (Delivery Instruction Slip) or digitally signed DIS given by client or POA.

Clearing Corporations (CCs) will have to provide client-wise net delivery obligations on T-day to the depositories.

Based on the obligation data provided by CCs, depositories will have to validate the depository transfer instruction details with CC obligation details based on trading member ID, quantity, settlement details etc.

In case of matching of all details, the instruction will be carried out by the depositories and such securities will be debited from client’s demat account and credited to linked TM pool account on or before the settlement day. In case of discrepancies, such transfer instructions will be rejected by the depositories.

The markets regulator has issued several frameworks in order to protect clients’ funds and securities and to ensure that the stock broker segregates securities or money of the client and does not use them for self or for any other client.

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