Sebi To Make Direct Payout Of Securities To Clients Mandatory; Here's How?

Sebi proposed to make it mandatory for clearing corporations to directly credit securities to clients' demat accounts to prevent misuse of securities
Sebi To Make Direct Payout Of Securities To Clients Mandatory
Sebi To Make Direct Payout Of Securities To Clients Mandatory

The Securities and Exchange Board of India (Sebi) on May 9, 2024, proposed to make mandatory the direct payout of clients' securities to their demat accounts. The credit will be done directly by clearing corporations to enhance operational efficiency and prevent misuse of clients' securities. Currently, the clearing corporations credit the payout of securities into the broker's pool account, which then credits it to the respective client's demat accounts.

Sebi has sought feedback from the public on this proposal until May 30, 2024. Notably, the direct payout to client accounts has been an option voluntarily since February 1, 2001, but now Sebi is considering making it mandatory. "It has been decided that the process of securities payout directly to the client account shall now be mandatory," Sebi said in its consultation paper.

How Does This System Work?

Under this framework, clearing corporations will credit securities directly to clients' demat accounts. Further, clearing corporations should provide a mechanism for Trading Members or clearing members to identify unpaid securities and funded stocks under the margin trading facility.

Regarding the funded stocks under the margin trading facility, Sebi said such stock held by the trading Member or clearing member should only be held by way of pledge in a separate demat account tagged ‘Client Securities under Margin Funding Account', solely for this purpose. "Such funded stocks shall be transferred to the respective client’s demat account followed by the creation of an auto-pledge (i.e., without the requirement of a specific instruction from the client) with suitable reason, in favour of ‘Client Securities under Margin Funding Account’,” Sebi said


On May 17 2023, Sebi specified various processes for handling clients' securities about pay-in and pay-out of securities. The aim was to protect clients’ securities and to ensure that the stock broker segregates the securities of the client or clients so that they cannot be misused.

The matter related to the funds of the clients has been addressed through the upstreaming and downstreaming of funds mechanism. Now the issue related to the flow of securities also needs to be addressed, Sebi explained.

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