SEBI issues unpaid securities guidelines, introduces auto-pledge system
SEBI on Friday came out with a regulatory framework for trading members (TMs) to handle clients’ unpaid securities, introducing an auto-pledge mechanism while laying down safeguards for investors.
Under the framework, if trades executed outside the Margin Trading Facility (MTF) remain unpaid, the securities will be credited directly to the client’s demat account. Instead of withholding the securities, an auto-pledge will be created in favour of a dedicated account of the trading member — the Client Unpaid Securities Pledgee Account (CUSPA) – without requiring any instruction or approval from the client. The pledge will be specifically marked as “unpaid”, as per SEBI guidelines.
After the pledge is created, the TM will be required to inform the client through email or SMS about the payment obligation and the TM’s right to liquidate the securities if the dues are not cleared, SEBI said in a circular.
The regulator has also directed TMs to formulate and maintain a policy for handling unpaid securities, either as a standalone policy or as part of their risk management framework, in line with the circular and operational guidelines issued by stock exchanges.
The policy must be communicated to clients before implementation. Moreover, the policy should clearly specify the reasons, manner and timeline for invocation or release of pledge and liquidation of unpaid securities. It must also prescribe the maximum period within which clients must meet their payment obligations, which cannot exceed five trading days from the pay-out date.
While securities pledged in the TM’s CUSPA can be considered for reporting client margin collection to the Clearing Corporation, trading members will not be allowed to provide additional trading exposure against such securities, Sebi said.
As long as the client’s payment obligation remains outstanding, the TM will have to determine the maximum value of securities that may remain pledged daily, based on the client’s ledger balance and overall margin obligations.
If the value of pledged securities exceeds the permissible limit, the TM must release the pledge on the excess quantity by the next trading day, in accordance with exchange guidelines. If the client fails to make payment within the prescribed timeline, the TM will invoke the pledge and liquidate the unpaid securities according to its policy, after giving reasonable notice to the client.
Upon invocation, the securities will be blocked for early pay-in in the client’s demat account, while maintaining an audit trail in the TM’s CUSPA account.
SEBI said that depositories will verify the block details against the client’s obligations, following which the securities will be sold in the market using the respective client’s Unique Client Code (UCC). Any surplus remaining after settlement of the client’s dues will be credited to the client’s ledger.
If the pledge is neither invoked nor released within five trading days after pay-out, depositories will automatically release the pledge at the end of the sixth trading day, making the securities available to the client as free balance without any encumbrance.
However, TMs may seek release of the pledge at any time before the automatic release.
Sebi also prohibited trading members from pledging or transferring securities held in CUSPA to banks or non-banking financial companies (NBFCs) for raising funds.
The regulator, however, allowed extension of the pledge in exceptional circumstances where liquidation is not possible within five trading days after pay-out, such as when the security is locked in the lower circuit with only sellers, trading is suspended or halted due to surveillance measures, or other valid reasons recognised by market infrastructure institutions (MIIs), including unforeseen circumstances beyond the TM’s control.
In such cases, the TM may seek an extension of up to one additional calendar week by submitting a request before 6 pm on the fifth trading day after pay-out. Further extensions of a similar duration may be sought only if the exceptional circumstances continue.
Once such conditions cease to exist, no further extension will be permitted. For every extension granted, the TM must notify the client. Failure to seek an extension within the stipulated timeline will result in a system-driven automatic release of the pledged securities.
Stock exchanges have been directed to issue operational guidelines for implementing the framework, in consultation with depositories, within 30 days of the circular’s issuance.
