Sebi Automates Sale Of Pledged Shares To Speed Up Recovery From Defaulters

In a major relief to brokers, the Securities and Exchange Board of India (Sebi) has introduced a new process to simplify the invocation and selling of securities pledged by defaulter clients as margin collateral. These changes are set to come into effect from September 5, 2025 onwards.

According to the new rules, brokers do not have to manually release pledged securities before selling them. Instead, depositories will offer a single combined instruction called ‘Pledge release for early pay-in,’ which will automatically release the pledge and immediately deliver the securities to the clearing corporations.

The regulator has further introduced a similar automated process for mutual fund units that are pledged as margin, but not traded on exchanges. These units will be invoked and auto-redeemed in a single seamless transaction.

Sebi has asked brokers and trading members to ensure that once securities are invoked as a margin, they are paid on the same day to avoid accumulation in the brokers’ accounts. If a client’s trading account is frozen or blocked after creation of a pledge, the broker can sell these securities under their own account to prevent delays in liquidation.

Sebi has also directed stock exchanges, clearing corporations, and depositories to update their systems and regulations accordingly, and provide detailed operating guidelines by July 1, 2025.

Why Sebi Came Out With This Circular

This move comes after the regulator found that large volumes of invoked, but unsold, pledged shares were accumulating in brokers’ dematerialised accounts, defeating the very purpose of invocation, which is to realise funds.

The existing process also posed challenges for brokers, especially when clients sold pledged shares, which required multiple steps including un-pledging and arranging delivery through physical or digital instructions, or using power of attorney.

Sebi said in a circular: “It has come to our notice that after invocation of the client’s securities pledged in favour of the dematerialised account of brokers, such invoked shares are lying unsold resulting into the accumulation of clients’ securities in the demat account of the broker. The said accumulation does not serve the purpose for which securities were invoked i.e. realisation of moneys.”