SEBI’s new rules for direct payout of securities: What’s changing?
Update: SEBI has extended the timeline for the implementation of the direct payout of securities. This will now come into effect from November 11, 2024.
The Securities and Exchange Board of India (SEBI) has introduced guidelines that will change how securities are credited to investors’ demat accounts. Currently, securities are credited to the broker, who then transfers them to the investor. Under new rules, securities will be directly credited to the investor’s demat account, making the process more efficient. These changes will happen in two phases starting on October 14, 2024. Here is an overview of what’s changing, how these changes will impact investors and brokers, and what to expect as the new regulations are rolled out:
How securities are currently credited to an investor’s demat account
When securities are bought, the Clearing Corporation (CC) first credits them to the broker’s pool account, after which the broker transfers the securities to the buyer’s demat account. Until this transfer is made, the broker holds control of the securities.
Another method called “direct payout for net settlement,” and here’s how it works:
- If the broker has 1,000 buyers and 500 sellers, 500 buyers are matched with 500 sellers, and the CC credits the shares directly to the remaining 500 buyers.
- If 100 of the sellers fail to deliver the shares, i.e., the shares are short delivered, the broker must either acquire them from the market or participate in an auction.
- If the shares cannot be obtained through the auction, the settlement is completed at a close-out rate.
Due to these complexities, Zerodha does not use the net settlement method.
How SEBI’s guidelines will change the process
The guidelines will be rolled out in two phases and will reduce the broker’s role by allowing the CC to directly credit securities to investors’ accounts.
- Phase 1: October 14, 2024 – January 13, 2025
During this phase, the CC will transfer securities directly to investors’ demat accounts for all equity cash segments and physical settlements.
However, in cases where the payout cannot be completed—such as rejected payouts, inactive demat accounts, or excess pay-in from a clearing member—the securities will still be temporarily credited to the broker’s pool account.
- Phase 2: Starting January 14, 2025
In the second phase, the direct payout system will apply to all security transactions, including Securities Lending and Borrowing (SLB) and Offer for Sale (OFS). This phase will fully implement the direct payout system, eliminating most of the broker’s involvement in the settlement process.
And in cases of short delivery, the CC will handle auction settlements directly, avoiding the previous complications that involved brokers sourcing shares from the market or settling using cash close out.
How securities are currently pledged with the broker
Currently, when a client buys securities without paying the full amount or through Margin Trading Facility (MTF), brokers manage the process. Here’s how it works:
- If the full payment is not made or the securities are bought using margin trading, the broker creates a pledge. This means the securities are transferred to the client’s demat account but are marked as “pledged” because the payment is incomplete.
- Once the client makes the full payment, the broker releases the pledge, giving the client full ownership of the securities.
During this process, brokers are responsible for managing pledged securities until payment requirements are fulfilled.
How SEBI’s guidelines will change the process
Under the guidelines, brokers will no longer handle pledges for unpaid or margin-funded securities directly. Instead, if a client doesn’t pay for the securities in full, the broker will request the CC to mark the pledge directly in the client’s demat account. Once the securities are fully paid for, the pledge will be released.
What changes for you?
As a client, nothing changes for you. These changes will take place behind the scenes and aim to improve the system’s efficiency and safety of client’s securities.
If you have any questions about SEBI’s new rules for direct payout of securities, please leave them in the comments below.
Na account is blocked in SEBI
Instant settlement or at the end of trading session?
Broker’s role must be phased out gradually and a transparent system be evolved. Brokers do many acts of violating the code of securities which go unnoticed to SEBI. Actually the whole system of buying and selling must come under the direct ambit of the exchanges, Sebi, CDSL and NSDL. On record a lot many brokers do unfair practices and the small investors become their victim in loosing money in the market.
Thank you for the information. Is India the first country to do this? It is right?
Will this also change the trade life cycle from the back end perspective?
“Under the guidelines, brokers will no longer handle pledges for unpaid or margin-funded securities directly. Instead, if a client doesn’t pay for the securities in full, the broker will request the CC to mark the pledge directly in the client’s demat account. Once the securities are fully paid for, the pledge will be released”
After this new circular, is a broker required to ‘request’ CC for unpaid/margin-funded securities to mark it as pledge as a mandatory step? Under extreme scenario, what if broker does not ‘request’ the CC to directly mark unpaid securities as pledge, will CC still mark them as pledge securities?