Brief Overview:

The framework for handling clients’ unpaid securities has been refreshed to align it with direct payout to clients’ demat accounts. The revised framework protects client ownership while enabling brokers to recover unpaid dues through a structured pledge-based mechanism.

Technical Details:

Key changes:

1) Auto-pledge mechanism: Unpaid securities will be credited to the client’s demat account and automatically pledged in favour of the trading member’s Client Unpaid Securities Pledgee Account (CUSPA).

2) Clear broker policy: Trading members must disclose a policy for invocation, release and liquidation, including the client payment timeline of up to 5 trading days from payout.

3) Daily review, faster release: Pledged securities must be reviewed daily; excess pledges must be released by the next trading day, while unpaid dues may be recovered through invocation and sale after reasonable notice.

4) Built-in release trigger: Uninvoked and unreleased pledges will be automatically released after the prescribed period, with limited extensions where liquidation is not feasible due to exceptional market restrictions.

5) No onward pledge: Securities pledged to CUSPA cannot be further pledged or transferred to banks/NBFCs for raising funds.

6) Phased go-live: The auto-pledge, release and invocation changes will apply three months after stock exchanges issue operational guidelines; the exceptional-extension provisions will apply six months from the circular date.

Takeaways:

The revised framework aligns the unpaid securities regime with the current settlement architecture and direct payout mechanism, provides greater clarity on pledge creation, release and invocation, and strengthens investor protection by prohibiting onward pledging. Trading members will need to update their policies, operational procedures and client communications accordingly.

For further details, please see:

SEBI | Handling of Client’s Unpaid Securities by Trading Members

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