SEBI Revises Framework For Clients' Unpaid Securities Held By Trading Members

The Securities and Exchange Board of India (SEBI) on 25 June amended the framework governing the handling of clients' unpaid securities by Trading Members, citing regulatory developments and operational challenges under the existing regime.

SEBI said regulatory changes, including the mandatory pay-out of securities to clients' demat accounts, and evolving market practices necessitated a revision of the framework. It also took into account stakeholder representations highlighting implementation challenges.

Under the revised framework, for trades outside the margin trading facility, unpaid securities must be credited directly to the client's demat account, following which an auto-pledge will be created in favour of a separate account titled "Client Unpaid Securities Pledgee Account (CUSPA)." Trading Members must also inform clients of their payment obligations and of their right to sell the securities in the event of default.

SEBI has also directed Trading Members to adopt a policy governing unpaid securities, including the invocation or release of pledges and liquidation of such securities. The policy must specify a payment timeline that cannot exceed five trading days from the pay-out date.

If a client fails to make payment within the prescribed period, the Trading Member may invoke the pledge and sell the unpaid securities after giving reasonable notice. Any surplus remaining after recovery must be credited to the client's ledger.

SEBI clarified that if the pledge is neither invoked nor released within five trading days, it will be automatically released on the sixth trading day, allowing the client unrestricted access to the securities.

Significantly, SEBI has prohibited securities pledged to CUSPA from being re-pledged or transferred to banks or NBFCs for fund-raising.

However, it has permitted the pledge period to be extended in exceptional circumstances, such as lower circuit conditions, suspension or trading halts, or other valid reasons recognised by Market Infrastructure Institutions.