Sebi proposes changes in margin pledge system to prevent securities' misuse

Sebi on Wednesday issued a draft circular proposing amendments to its margin pledge system to prevent the possible misuse of clients' securities by brokers.

These changes aim to enhance transparency and reduce systemic risks associated with clients' securities. 

 

The Securities and Exchange Board of India (Sebi) has invited public comments on the draft circular 'Margin obligations to be given by way of Pledge/re-pledge in the depository system' by March 4.

The regulator noted that brokers have not been selling clients' securities invoked under the margin pledge system on the same day, resulting in the accumulation in brokers' demat accounts. This accumulation may lead to a potential misutilisation of clients' securities, prompting the need for regulatory intervention.

 

Under the proposed changes, Sebi intends to introduce a mechanism where clients' securities, upon invocation, will be blocked for early pay-in within the client's demat account. This move will reduce the chances of brokers misusing securities while ensuring a clear transaction trail.

In addition, the markets watchdog has acknowledged operational difficulties faced by brokers when client sells pledged securities. The existing process requires brokers to first un-pledge the shares before transferring them for settlement.

To streamline this, Sebi proposed to introduce a single instruction in the form of 'pledge release for payin' where the pledge will be released and the pay-in block will be set-up immediately in the client's demat account.

Further, depositories will provide the necessary functionality for the 'pledge release for pay-in' system to ensure compliance with the new norms, Sebi said.

Once implemented, the brokers will no longer need physical or electronic instructions to process un-pledging and delivery, as the system will automatically validate the pay-in to the extent of the client's obligation, it added.

The proposed changes will protect the interests of investors in securities market while ensuring that clients' securities remain safeguarded from potential misuse.