SEBI Introduces New Rule- Direct Payout of Securities

When you buy a share from your broker, a lot goes behind the scenes before the shares are credited to your account. The Securities and Exchange Board of India (SEBI) has recently introduced changes to how securities will get credited to your account. In this article, we will look at the details of the proposed changes.

The Current Process

In the current process, when you buy a share, the shares are first credited to your broker's account, who then transfers it to your account. Let us look at the process in more detail.

When you buy a security, the Clearing Corporation (CC) credits the securities to the broker's pool account. In the next phase, the broker transfers the securities to your Demat account, and it gets reflected in your account. There is a time when the broker holds your securities.

• In the current process, there is another method that some brokers have adopted, which is called net settlement. Here are the details of the process:
• Assume that a broker has 10,000 buyers and 5,000 sellers. In this case, 5000 buyers will be matched with 5000 sellers. Who is still unsettled? 5000 buyers, right? In this case, CC will directly credit the shares to the remaining buyers.
• If, for any reason, 1000 sellers fail to deliver the shares (shares were short-delivered), it is the responsibility of the broker to either acquire the shares from the market or participate in the auction.
• If the broker cannot obtain the shares from the auction, the settlement will be marked as complete at the close-out rate.

The Changes Introduced

As per the new guidelines, the brokers' role will be limited to the crediting of the shares. Now, the shares will get directly credited to investors' Demat accounts. The changes will be rolled out in two phases:

Phase 1: October 14, 2024 - January 13, 2025

During this initial phase, the Clearing Corporation (CC) will directly transfer securities to investors' demat accounts for all equity cash and physical settlements. However, in certain cases where direct payout is not feasible, such as rejected payouts, inactive demat accounts, or excess payments, the securities will be temporarily held in the broker's pool account.

Phase 2: Starting January 14, 2025

The second phase will expand the direct payout system to encompass all security transactions, including Securities Lending and Borrowing (SLB) and Offer for Sale (OFS). This will significantly reduce the broker's role in the settlement process.

Moreover, in the event of short deliveries, the CC will directly handle auction settlements, eliminating the need for brokers to source shares from the market or resort to cash closeouts.

Pledging Process & Proposed Changes

Currently, when investors purchase securities on margin or without full payment, brokers manage the pledge process. This involves transferring securities to the investor's demat account but marking them as pledged until full payment is received.

SEBI's new guidelines streamline this process. Brokers will no longer directly manage pledges. Instead, they will request the Clearing Corporation (CC) to mark the pledge in the investor's demat account directly. Once the investor makes the full payment, the CC will release the pledge. This change will reduce the involvement of brokers in the pledge process, streamlining the overall settlement process.

Conclusion: What changes for investors?

Nothing will change for the investors as all this happens behind the scenes and will remain that way. You won't see any difference in your buying process or settlement process.