SEBI Extends Deadline for Direct Pay-Out of Securities

Margesh Rai

23 Oct, 2024

The deadline for implementing the Securities and Exchange Board of India’s (SEBI) new regulation requiring the direct payment of securities to clients’ demat accounts has been extended. Brokers and depository participants will have more time to adjust to the reforms intended to improve investor protection thanks to this delay.

By guaranteeing that the proceeds of stock market transactions be sent straight to investors’ accounts, the law aims to remove the risk associated with brokers holding shares on behalf of clients. This blog explores the ramifications of SEBI’s ruling, its importance to investors, and its potential effects on the Indian securities market going forward.

What is Direct Pay-Out of Securities?

Direct Pay-Out of Securities refers to a system where CCs, i.e., Clearing Corporations, directly transfer securities to demat accounts of the investors. This system ensures investor protection and helps in establishing transparency in the ecosystem.

This mechanism ensures that client securities are held separately from broker-owned securities.

Benefits of Direct Pay-out of Securities

Given below are some of the less explored benefits of Direct Pay-out of securities-

• It gives a green signal to the fact that securities are directly credited to the demat account of the client. Furthermore, it reduces the risk of misuse by brokers.
• Direct pay-out creates a pathway through which clients get direct visibility as well as control over their securities.
• It enhances transparency and streamlines operations.
• It develops trust and confidence in the minds of investors. It’s not wrong to say that direct pay-out give wings to a secure investment climate.

The previously embraced practice of pooling securities posed various forms of risks, such as counterparty risk, lack of transparency, etc. Such risks can be minimized through this new revolutionary mechanism.

New Schedule for Direct Securities Transfer to Demat Accounts

To guarantee a seamless rollout without causing any inconvenience to investors and market participants, the Securities and Exchange Board of India (SEBI) on Thursday expanded the due date for the implementation of direct stock payments to clients’ demat accounts to November 11.

According to SEBI, the extension, which was first scheduled for October 14, was made in response to input from the Brokers’ Industry Standards Forum. Based on SEBI’s review meeting with MIIs and the representation provided by Brokers’ ISF, it has been decided that the circular will go into effect on November 11, 2024, to enable the smooth payment of securities directly to the client’s demat account without interfering with investors or market participants.

Only a day had passed since the National Stock Exchange Ltd. (NSE) announced the start date of the direct payouts under the T+1 rolling settlement mechanism. The goal of SEBI’s new regulations, which will be put into effect in two stages to streamline the settlement process by allowing stocks to be directly credited to investors’ demat accounts following a trade.

The Clearing Corporation (CC) first credits stocks to the broker’s pool account following an investor’s purchase under the present arrangement. The securities are then moved to the buyer’s demat account by the broker. Until the last transfer to clients, the broker retains possession of these securities.

What does the SEBI’s Order Aim for?

According to SEBI, the order aims to reduce risk, improve operational efficiency, and safeguard the client’s assets. Currently, the broker receives credit for securities, which they then pass on to the investor. Since equities will be credited directly to the investor’s demat account under the new laws, the process will be more efficient.

Under the new laws, promises for securities that are unpaid or funded by margin will not be handled by brokers. Instead, the broker will request that the CC record the promise in the client’s demat account if the customer does not pay the entire amount due for the securities. Following the complete payment of the securities, the promise will be made available.

According to the regulations, exchanges and clearing firms will pay out settlements by 3:30 pm when the direct payout mechanism is put into place. On the payment day, the day after the deal, the timing was formerly 1.30 pm.

Why the Extension of Deadline?

SEBI is committed to making compliance easier and improving investor convenience, which is why it decided to extend the deadline. The action was taken in response to market participants’ representations and is intended to make the procedure easier for investors who want to protect their money for the future.

Promoting Adherence:

Registrar and Transfer Agents (RTAs), asset management companies (AMCs), and depository participants have been encouraged by SEBI to aggressively push holders of mutual fund units and demat accounts to comply with the nomination criteria. These organisations are instructed to send emails and SMS to non-compliant unit holders every two weeks to maintain compliance. Investors will get instructions in the communications on how to submit a nomination or withdraw from one.

Understanding Demat Accounts:

An electronic account that contains digital shares and securities is called a demat account, short for a dematerialised account. Everything is kept online rather than on paper certificates. This greatly simplifies and secures stock market trading and investment. SEBI’s move to extend the period for individuals to select beneficiaries for their demat accounts demonstrates their recognition of the significance of these accounts in financial planning.

Wrapping Up

By extending the deadline for implementing the direct payout of stocks to clients’ demat accounts, SEBI has demonstrated its dedication to making sure that the transition goes smoothly for all market players.

SEBI aims to lower operational risks and enhance investor protection by allowing brokers and depository participants more time to adjust to the new system. Direct stock transfers to clients’ demat accounts would promote more transparency in the securities sector and significantly reduce the possibility that investors’ assets will be misappropriated. Investors’ confidence in the trading system is bolstered by this regulatory move, which ensures that their funds are managed safely.

As the market adjusts to this revised timetable, brokers and investors alike should be prepared for the next adjustments, which are a positive step towards a safer and more efficient trading environment in India.

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