SEBI’s New Rules for Direct Payout of Securities: Here’s How It Impacts Investors
After purchasing a security, there are several mechanisms at work behind the scenes before the securities are credited to your demat account. However, the Securities and Exchange Board of India (SEBI) has laid out new guidelines to make the payout process efficient and safe.
Read on to learn how the guidelines will impact the payout process and its impact on investors.
Direct Payout System
Presently, securities are first credited to the broker before they are transferred to the investor. SEBI has announced guidelines for the implementation of direct payout of securities. Under the new system, securities will be directly credited to an investor’s account instead of being transferred to the broker.
The new system will be implemented in two phases. The timeline for the first phase was extended from October 14, 2024 to November 11, 2024. Phase 1 is expected to conclude on January 13, 2025. The implementation of the second phase is expected to begin from January 14, 2025.
Current Process of Crediting Securities to an Investor’s Demat Account
Currently, after the purchase of any securities, the clearing corporation (CC) credits them to the pool account of a broker. The broker will hold the securities till the transfer is made to the investor’s demat account.
Direct Payout for Net Settlement
The direct payout for net settlement is another method used to credit shares to an investor. Here is how it works:
- In the case a broker has 100 buyers and 50 sellers, 50 sellers will be matched with 50 buyers. Following this, the CC will credit the securities to the remaining 50 buyers.
- If 10 of the sellers short-deliver the shares or fail to deliver them, the broker acquires them from the market or through an auction.
- The transaction is settled at a close-out rate in case the broker is unable to acquire the shares through the market.
Changes in the Process
As per SEBI’s guidelines, the changes will be implemented in two phases which will result in the reduction of the broker’s role in the clearing process.
In the first phase, the CC will directly credit the securities to an investor’s demat account. The changes will be applicable for equity cash segments and physical settlements. In cases of rejected payouts, inactive demat accounts, or excess pay-in from a clearing member that prevents the completion of the payout, the securities will be credited temporarily to the broker’s account.
In the second phase, the direct payout system will be applicable to all security transactions. The system will also be applicable to Securities Lending and Borrowing (SLB) and Offer for Sale (OFS). The rollout of the second phase will eliminate most of the broker’s involvement in the settlement process.
Under the second phase, the CC will be responsible for handling auction settlements in the case of short delivery. This will streamline the process by reducing the complications of brokers sourcing shares or using the cash close-out method to settle shares.
Pledging of Shares
Shares are said to be pledged when an investor has not made the full payment for the shares or has utilised the Margin Trading Facility (MTF). Under the new guidelines, the roles of brokers in handling the pledging of shares will be reduced. The broker will request the CC to mark pledged shares in an investor’s demat account if the full payment has not been made. Previously, brokers were responsible for managing pledges.
Impact on Investors
The new guidelines will have no impact on investors. However, the changes will reduce complications and make the payout system more efficient. The new changes will be implemented to streamline the payout system while increasing safety for investors.