Capital market regulator the Securities and Exchange Board of India (Sebi) has harden the rules for usage of client funds by brokers. The provisions of the June SEBI circular were to be applicable from September 1 2019. However effective deadline extended by one month for trading members to implement new provisions related to use of clients’ securities. Hence this provisions now will be in effect from 1st october 2019.
In 2018, Sebi took action against no. of brokers who were misappropriating client funds and securities. SEBI has witnessed several instances where brokers used client funds to pay for their proprietary trades. Suppose that you have transferred money to your trading account but did not use it to buy securities. The broker could misuse this money.
To prevent this Earlier Sebi has introduced a rule that once every 30 or 90 days (depending on what the customer had agreed to at the time of opening the account), unutilised funds have to be transferred back to customers.
Important Provisions Mentioned In SEBI Circular:
- According to new rules, brokers have been urged to transfer the securities to their client accounts within one day of receiving payment.
- Moreover if the client defaults on the payment, brokers have been asked to hold the securities up to 5 days. After this they can liquidate the securities in the market and recover dues.
- Sebi circular also mentioned that, Under no circumstances, shall the securities of the clients received in pay-out be retained by the trading member/Brokers for more than 5 trading days and be used for any other purpose.
- Further, the SEBI has said the securities which are lying with brokers for non-receipt of payment from clients cannot be used by the broker as collateral margin for any of the proprietary trades or can be pledged with financial institutions like banks.
- Brokerages have also been urged to close any client accounts that don’t fall under category of pool account, client margin trading securities account and client collateral account by August 2019.
- “Securities lying with trading member/clearing member(TM/CM) in client collateral account, client margin trading securities account and client unpaid securities account(CUSA) shall not be permitted to be pledged/transferred to banks/NBFCs for raising funds by trading member/clearing member”.
Client Unpaid Securities Account(CUSA):
- Need to open a separate ‘client unpaid securities account’ by August 31 with regard to securities that have not been paid in full by the clients.
- Unpaid securities to be moved from the pool account to the CUSA.
- Securities lying in CUSA shall be either transferred to the demat account of the respective client account(upon fulfillment of client obligation) or shall be disposed offby the members within 5 trading days afther the pay-out.
- In case securities kept in CUSA beyond 7 trading days after the payout , the depositories shall levy penalty on the member (this penalty will not be permitted to be recovered from the clients).
- Securities that are bought under MARGIN TRADING FACILITY (MTF), shall be kept in a separate account titled as “Client Margin Trading Securities Account”.
How many type of beneficiary accounts are required to be maintained after October 1, 2019?
There will be primarily 7 types of DEMAT accounts that shall be maintained by Members post October 1, 2019:
- Pool account (Stock Broker – Pool account)
- Early Pay-in Account (In case of CDSL)
- Client Unpaid Securities Account
- Own Beneficiary Account (Stock Broker-Proprietary Account)
- Client collateral account (for holding client securities for margin purpose and onward transfer to Collateral Account for pledging with Clearing Corporations (“CC”) or transfer to Clearing Member (“CM”)
- Collateral account (for pledging own & client securities with CCs)
Can Member transfer the securities to the client in the event of non-payment?
- Member may transfer the unpaid client securities from pool/unpaid securities demat account to client’s demat account in accordance with its Risk Management (RMS) Policy.
- Such policy shall be duly approved by its Board (in case of corporate trading member), Partners (in case of partnership firms) or Proprietor (in case of sole proprietorship firm) as the case may be and informed to the clients.
- In case the RMS policy does not permit transfer of securities to clients in the event of non-payment, then such securities shall be disposed-off within 5 trading days from the date of pay-out., in proportion to the amount not received and after taking into account any amount lying to the credit of the client. The balance securities shall be transferred to the respective client’s demat account.
To strengthen the regulation of stock brokers, markets regulator Sebi is pondering additional measures to prevent misuse of client’s securities. Last year has also seen cases of shell accounts being used to carry out fraudulent or non-genuine trades.
Besides this SEBI is also trying hard to initiate technology-based measures to streamline the sharing of information among the stock exchanges, depositories.