Sebi has floated a draft circular proposing changes to its margin pledge system. If implemented, it will aim to reduce the chances of brokers misusing the securities and ensure a transparent transaction process
The Securities and Exchange Board of India (SEBI) on February 12 proposed amendments to its margin pledge system to mitigate the risk of misappropriation or misuse of client’s securities. The capital market regulator has invited public feedback on the draft circular, "Margin Obligations to be Given by Way of Pledge/Re-Pledge in the Depository System," by March 4.
Sebi has noticed that when brokers invoke client securities pledged to their demat accounts, they often do not sell those shares on the same day. This results in the accumulation of securities in the demat account of the broker, which increases the risk of misuse of client securities.
"Hence, in a move to mitigate the risk of misuse of client’s securities, it is being proposed to block the securities for early pay-in in client demat account upon invocation," Sebi said. This step aims to reduce the chances of brokers misusing the securities and ensure a transparent transaction process.
Further, the regulator noted that brokers face operational challenges when clients sell the pledged securities under the existing system. As per the existing system, when selling pledged shares, there is a two-step process – Un-pledging the pledged shares and pay-in of securities.
To simplify this, Sebi proposed to introduce a single instruction in the form of “pledge release for paying” where the pledge will be released and the pay-in block will be set up immediately in the client demat account.
Depositories will be responsible for setting up the necessary infrastructure to support the new "pledge release for pay-in" system and ensure it follows the updated rules. This will eliminate the need for manual or electronic instructions to un-pledge and deliver securities, as the system will automatically verify the pay-in against the client’s obligations.