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SEBI Clarification on Execution of DEMAT Debit and Pledge Instructions

Nikhil Mogha

| Updated: Oct 11, 2022 | Category: Latest News

Debit and Pledge Instruction

The SEBI has issued a clarification on the execution instructions of “DEMAT Debit and Pledge Instructions”, or DDPI vide dated 6th October 2022. The current instructions provide modifications and certain amendments.The SEBI circular dated 23rd April 2022 on the execution of Power of Attorney by the Stock Exchanges and Depositories. SEBI has further issued the clarification on this matter via circulars dated 31st August 2010 and 27th August 2010, which inter alia provides that the Power of Attorney (PoA) is optional and shall not be insisted upon by the Stock Broker or depository participant. Further, the earlier dated circular provides that the utilisation of the POA, if executed, shall be utilised for the purpose of:

  1. Transfer of securities held in BO (Beneficial Account) of the client towards Stock Exchange deliveries and Settlement Obligations.
  2. Pledging or Re-pledging of Securities to Trading Member or Clearing Member.
  3. For purposes mentioned in Paragraphs 1 (iii) and 2 of the Enclosure to the POA guidelines, 2010.

Consequently, the SEBI, through a circular dated 4th April 2022, provides that in order to facilitate the above transactions,a separate document, i.e. DEMAT Debit and Pledge Instruction[1], shall be executed in favour of the Stockbrokers or Depositories Participant, and it will act evidence for clear transfer of authority.Therefore,to improve transparency and inclusion of other securities, a separate document is introduced, which shall serve the same purpose as PoA and mitigate the misuse of PoA. Further, the said circular shall be effective from 18th November 2022. The current clarification is issued to include other transactions in the process of facilitation which are enumerated below:

Widening the Scope of DEMAT Debit and Pledge Instruction

The SEBI has widened the scope of execution of the DEMAT Debit and Pledge Instruction in consolation with the Broker Associations and Depositors Participant. Further, it is being decided that the DDPI will include the following:

  1. Mutual Fund Transactions are executed on the Stock exchange through order Entry Platforms.
  2. Tendering of shares takes place through Open offers in the Stock Exchanges.

Amendments and Modifications in the Circular

The current clarifications have amended and modified various provisions of the earlier instructions on executing DEMAT Debit and Pledge instructions. The SEBI has made amendments in consultation with the Broker Associations and Depositories to facilitate transparency among the transactions. The amendments and modifications are:

1. Amendments in Para 3

To provide transparency, the following conditions shall be complied with in the form of a separate document.

  1. The transfer of securities that are held in the beneficial owner account of the client and are used for:
  2. Stock Exchange-Related Deliveries
  3. Settlement Obligations

Further, it is provided that the obligation and deliveries shall arise out of the trades that the client executes on the Stock Exchange through the same stockbroker.

  • The pledging or Re-pledging of Securities for the purpose of meeting the margin requirements of the clients. The pledge or Re-pledge shall take place in favour of:
  • Trading Member
  • Clearing Member
  • The Mutual Fund Transactions are executed on Stock Exchange order Entry platforms. It is mandatory that the executed transactions shall comply with SEBI circulars:
  • Discontinuation of usage of pool accounts for transactions in units of Mutual Funds on the Stock Exchange Platforms (SEBI Circular: SEBI/HO/IMD/IMD-I DOF5/P/CIR/2021/634, dated 4th October 2021)
  • Discontinuation  of  usage  of  pool  accounts  by  entities, including  online  platforms  other than stock exchanges for transactions in the units of Mutual Funds (SEBI Circular: SEBI/HO/IMD/IMD-I DOF5/P/CIR/2021/635 2021 dated 4th October 2021)
  • Clarifications with respect to Circular Discontinuation of usage of pool accounts for transactions in the units of Mutual ( SEBI Circular: SEBI/HO/IMD/IMD-I DOF5/P/CIR/2022/29 dated 15th March 2022)
  • Any other circular issued in this regard
  • The tendering of shares taking place through open offer shall be made in compliance with the following:
  • Tendering of shares in available offers, buybacks, and delisting offers by marking lien in the DEMAT account of the shareholders ( SEBI Circular: SEBI circular SEBI/HO/CFD/DCR-III/CIR/P/2021/615 dated 13th August 2021)
  • Any other Circular in this regard

2. Modification in Para 8

The modification provided in Para 8 under the current clarification can be simplified as follows:

  1. The transfer of securities taken place through DEMAT Debit and Pledge Instruction shall be credited to the client’s:
  2. Trading Member Pool Account
  3. Clearing Member Pool Account
  4. DEMAT account of Clearing Corporation
  5. The DDPI shall be registered in the DEMAT account of the client
  6. The Stockbroker and Depository Participant providing the facility of DDPI to its client’s shall make sure that it has enabled its clients to revoke or cancel the DDPI.

3. Modification in Para 9

The clients who have issued DEMAT Debit and Pledge Instruction with the stock broker or depository participant have to comply with the following provisions of the SEBI circular:

ProvisionsCircularEffective Date
Paragraphs 4.2.1 and Paragraph 4.2.2SEBI/HO/MIRSD/DOP/CIR/P/2020/158 dated 27th August 20201st September 2022
Paragraph 1 (i) and 1 (iii)CIR/MRD/DMS/13/2010 dated 23rd April 20101st September 2022
Paragraph 1 (iii) to the extent of Mutual; Fund Transactions and Tendering of Shares through Open offersCIR/MRD/DMS/13/201018th November 2022

Directions to Stock Exchanges and Depositories

The stock exchanges and depositories shall:

  1. Bring provision of this circular to the notice of
  2. Members
  3. Participants

Further, they shall put the details on their website

  • Make the clients aware of the availability of the facility for the execution of DDPI through Letters, SMS, or E-Mail.
  • They shall make necessary amendments to the bye-laws, Rules and Regulations to implement the circular’s provisions.

Conclusion

To mitigate the risk of misuse of PoA executed by the client for specific transactions, SEBI has issued a circular to execute DEMAT Debit and Pledge Instruction. The clarification issued by the SEBI in pursuance of the circular dated 4th April 21022 will now include mutual funds transactions and tendering of shares through an open offer. Moreover, the stockbroker and depositories are asked to intimate the clients about the provisions of the circular so that the execution can be made accordingly.

Read our Article: Sample Format of Power of Attorney

Nikhil Mogha

An Advocate by profession, Nikhil Mogha holds experience in the field of Business and Securities law. He has done his Masters of Law in Corporate Law from Guru Gobind Singh Indraprastha University, New Delhi. He is also versed with the drafting and research work in the field of Company Law, Banking Laws and Contract Laws.

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