The Securities and Exchange Board of India has come up with a new set of rules for the credit of securities into investors’ accounts. Currently, the securities when bought by the investors are first transferred to the brokerage house and then they transfer the same to the investor. SEBI’s new rule will change this process so that securities can be transferred directly to the investors’ accounts, which will make the process easier, faster, and more convenient. The SEBI’s new rules for securities payout will be implemented in two phases starting from 14 October 2024. So, how will these changes affect the investors? Let’s find out.
Present Process of Securities Transfer
Currently, when one buys securities, the clearinghouses credit them to the brokerage houses’ pool account. From there, the brokerage house transfers the securities to the Demat account of the buyer. Until the securities reach the investors’ Demat account, the control over the securities remains with the broker.
Apart from these, another method is followed currently, which is known as “direct payout for net settlement” where if a brokerage house has 100 buyers and 50 sellers, then 50 buyers are matched with the 50 sellers, and the clearing house then directly transfers the securities to the 50 buyers matched.
However, if the sellers couldn’t deliver the shares, then the brokerage house needs to buy the securities from the market or take part in an auction to acquire them.
Now if the broker cannot even acquire shares in the auction, then the process of settlement will be done at a closeout rate.
Since this method is too much complex, many brokerage houses do not opt for this one.
Process after Implementation of SEBI’s New Guidelines
As mentioned above, the implementation of SEBI’s guidelines for direct payout will take place in two phases –
- Phase I: This phase will start on 14 October 2024 and will end on 13 January 2025 as decided as of now. During this time, the clearing houses will transfer the securities directly to the Demat accounts of the investors for all the equity cash and physical settlement segments.
Only in case the securities cannot be credited to the investor’s account due to inactive Demat accounts, rejected payouts, or excess pay-in by clearing houses, then it will be credited to the brokerage house’s pool account.
- Phase II: This phase will roll out from 14 January 2025 when SEBI’s direct payout of securities rule will apply to all types of securities. Even the same will be applicable for Securities Lending and Borrowing (SLB) as well as for Offer for sale. Post this phase, the brokerage house’s involvement in the settlement process will be significantly reduced. In case of short deliveries, clearing houses will tackle the same themselves without involving the brokerage house in between.
Present Process of Securities Pledging
When securities are purchased on credit or through a Margin trading facility (MTF), brokerage houses are inevitably involved in the entire process. As they are the ones creating a pledge for the securities bought without full payment or via MTF. Now the pledge is removed after the buyer makes the full payment and then the brokerage house transfers the ownership of the securities to the purchaser. Now here the role of brokers is crucial as they not only hold the ownership for the pledged period but also manage the securities for the duration.
How will it change after SEBI’s guidelines?
With the new guidelines from SEBI regarding the credit of securities, the brokers will not be handling the pledged securities after the rules are implemented. It will be the clearing houses again to mark the securities pledged until full payment for the same is done or if the securities are on the margin.
Wrapping up
Thus, SEBI’s new rules for securities payout will help in streamlining the entire trading and investment process, and reduce the involvement of the intermediaries as much as possible. With the lesser involvement of brokerage houses, the cost of investment will also be reduced and complexities present in the system now can be eliminated.
Source: Mint
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Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.