Summary of this article
Brokers get only five trading days to act on unpaid shares
Investors will receive timely updates on unpaid share purchases
New rules limit brokers' powers and offer greater investor protection
The Securities and Exchange Board of India (Sebi) has revised the rules for handling unpaid client securities by stockbrokers. The new framework sets stricter timelines, requires brokers to keep investors informed at every stage and lays down a clear procedure for cases where the shares cannot be sold immediately.
Under the revised rules, brokers can hold unpaid securities under pledge for a maximum of five trading days. Within this period, they must either release the pledge if the client clears the dues or invoke it and sell the shares to recover the outstanding amount. The only exception is when market conditions, such as trading restrictions or lower circuit limits, prevent the sale.
The changes, notified through a Sebi circular on July 3, update the existing framework to reflect the current settlement system, under which purchased shares are credited directly to an investor's demat account. The regulator said the revisions also address operational issues flagged by the broking industry.
The revised framework replaces provisions introduced in 2019 and updated in 2022. Sebi said the market has changed considerably since then, particularly after the introduction of mandatory direct credit of securities into investors' demat accounts. The regulator also noted that brokers, through the Brokers' Industry Standards Forum (ISF), had sought changes to address operational difficulties under the existing system.
How The New Rules Will Work
Under the revised framework, shares bought by an investor will continue to be credited directly to their demat account even if the full payment has not been made. However, these securities will be automatically pledged in favour of a separate account maintained by the broker, known as the Client Unpaid Securities Pledgee Account (CUSPA), until the payment obligation is met.
The auto-pledge will apply only to transactions outside the Margin Trading Facility (MTF), under which investors borrow money from brokers to purchase shares. Since the pledge is created automatically, investors will not have to submit fresh instructions.
Brokers will also have to promptly inform clients through email or SMS about the outstanding payment and notify them that the pledged securities may be sold if the dues are not cleared within the prescribed period.
Brokers To Follow A Clear Policy On Unpaid Shares
Sebi has also asked every trading member to put in place a clear policy for dealing with unpaid securities and share it with clients before implementing it. The policy can either be a standalone document or form part of the broker's broader risk management policy.
It must clearly spell out when a pledge can be invoked or released, how unpaid shares will be sold and the time available to clients to clear their dues. Under the revised rules, brokers cannot give clients more than five trading days from the payout date to make the payment.
The regulator has also clarified that while brokers can continue to count these pledged securities for reporting margin collection to the clearing corporation, they cannot allow clients to take fresh trading positions against them. This means unpaid shares cannot be used to obtain additional market exposure until the outstanding amount is settled.
Brokers To Review Pledged Shares Every Day
The revised rules also require brokers to review unpaid pledged securities on a daily basis. They will have to determine how much of a client's holdings need to remain under pledge after considering factors such as the client's ledger balance, margin obligations and other criteria specified by stock exchanges.
If the value of pledged securities is higher than required, the broker must release the excess shares by the next trading day.
Where a client fails to clear the outstanding dues within the prescribed period, the broker can invoke the pledge and sell the shares after giving the client reasonable notice. Before the sale takes place, the securities will be blocked in the client's own demat account for early pay-in, while the broker's CUSPA will maintain a record of the transaction.
Sebi has also said that the shares must be sold using the concerned investor's Unique Client Code (UCC). If the sale generates more money than required to recover the outstanding dues, the remaining amount must be credited back to the client's ledger.
Automatic Release After Five Days
The revised framework also prevents unpaid securities from remaining under pledge for an indefinite period.
If a broker neither invokes nor releases the pledge within five trading days from the payout date, the depositories will automatically remove the pledge at the end of the sixth trading day. Once this happens, the shares will become freely available in the investor's demat account without any restriction.
Sebi has also barred brokers from using securities held under the CUSPA to raise funds from banks or non-banking financial companies (NBFCs). This means shares pledged because of unpaid dues cannot be repledged or transferred by brokers to borrow money.
Limited Relaxation In Exceptional Cases
Sebi has also provided limited flexibility for situations where brokers are unable to sell unpaid securities despite following the prescribed process.
An extension can be sought if the shares are locked in the lower circuit with only sellers in the market, trading has been suspended due to surveillance or other regulatory reasons, or any other unforeseen circumstance recognised by market infrastructure institutions prevents their sale.
To avail of this relief, brokers will be required to apply for an extension by 6 PM on the fifth trading day after the payout date. The pledge can then be extended by up to one calendar week. If the exceptional circumstances continue, brokers may seek further extensions for the same duration. However, once those conditions cease to exist, no further extension will be allowed.
Brokers will also have to inform clients every time an extension is granted. If they fail to apply within the prescribed timeline, the pledge will be released automatically through the system.
Rollout To Happen In Phases
The revised framework will not take effect immediately. Sebi has directed stock exchanges, in consultation with depositories, to issue detailed operational guidelines within 30 days of the circular.
The provisions relating to the creation, management, invocation and release of pledges will come into force three months after these operational guidelines are issued. The rules covering extensions in exceptional cases will take effect six months from the date of the circular.
Before the new framework is implemented, stock exchanges and depositories will also have to amend their rules and put the necessary systems in place to support the revised process.
What It Means For Investors
The revised rules make the handling of unpaid securities more transparent and time-bound. Shares will continue to be credited to the investor's demat account, while brokers can hold only a pledge until the payment is made.
Brokers must inform clients about unpaid dues and either release the pledge or sell the shares within five trading days, except in specified exceptional cases. The rules also prevent brokers from holding or re-pledging unpaid securities indefinitely, offering investors greater protection.
