SEBI permits Trading or Clearing Members to handle clients’ securities

Jun 21, 2019 | by Avantis RegTech Legal Research Team


The Securities and Exchange Board of India (SEBI) on June 20, 2019, in order to protect clients’ funds and securities, permits the Trading Members or Clearing Members (TM/CM) to provide running account for securities and create a lien on the client securities to the extent of the clients’ indebtedness to the TM/CM.

The Securities Contracts (Regulation) Act, 1956 and SEBI (Stock-Brokers) Regulations, 1992 specifies that the stock broker shall segregate securities or moneys of the client or clients or shall not use the securities or moneys of a client or clients for self or for any other client. Further, the following circulars were issued by SEBI from time to time detailing the operational modalities with respect to handling of client’s funds and securities by stock broker, where, all TM/CM are required to transfer the clients securities received in pay-out to clients demat account within one working day. In case the client does not pay for such securities received in pay-out, then the TM/CM shall be entitled to retain those securities up to five trading days after pay-out. Further, where the client fails to meet its funds pay-in obligation within five trading days from payout day, the TM/CM shall liquidate the securities in the market to recover its dues. Under no circumstances, shall the securities of the clients received in pay-out be retained by the TM/CM beyond five trading days and be used for any other purpose.

In order to provide clarity with respect to a TM/CM maintaining a running account for client securities and pledging the client securities with Banks/NBFCs, after discussions with the Exchanges, Depositories and Clearing Corporations, the following advice is issued:-

1.The securities received in pay-out against which payment has been made by clients, shall be transferred to the demat account of the respective clients within one working day of the pay-out.

2.a separate client account titled – “client unpaid securities account” shall be opened by the TM/CM. Unpaid securities shall be transferred to such “client unpaid securities account” from the pool account of the concerned TM/CM

3.The securities kept in the ‘client unpaid securities account’ shall either be transferred to the demat account of the respective client upon fulfilment of client’s funds obligation or shall be disposed off in the market by TM/CM within five trading days after the pay-out.

4.In case the clients’ securities are kept in the ‘client unpaid securities account’ beyond seven trading days after the pay-out, the depositories shall under their bye-laws levy appropriate penalties upon such TM/CM which shall not be permitted to be recovered from the client.

5.The securities that are bought under Margin Trading Facility, shall be kept in a separate account titled as – ‘Client Margin Trading Securities Account’.

6.The client securities received as collateral shall be used only for meeting the respective client’s margin requirement by way of depositing the same with Stock Exchange/ Clearing Corporation/ Clearing House.

7.With effect from September 01, 2019, clients’ securities lying with the TM/CM in “client collateral account” , “Client Margin Trading Securities account” and “client unpaid securities account” cannot be pledged to the Banks/NBFCs for raising funds, even with authorization by client as the same would amount to fund based activity by TM/CM which is in contravention of Rule 8(1)(f) & 8(3)(f) of Securities Contracts (Regulation) Rules, 1957.

8.Accordingly, the clause 2.5 of SEBI Circular SEBI/HO/MIRSD/MIRSD2/CIR/P/2016/95 dated September 26, 2016, and clause 2(c) of SEBI circular CIR/HO/MIRSD/MIRSD2/CIR/P/2017/64 dated June 22, 2017, stands deleted with effect from June 30, 2019.

This Circular will come into effect from September 01, 2019 and any non-compliance of the provisions issued under this circular shall attract the penalty and other enforcement action as may be laid down by Exchanges, Clearing Corporations, Depositories and SEBI.

[Circular No. CIR/HO/MIRSD/DOP/CIR/P/2019/75]

Click here to download the Circular.

 


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