Capital Market

SEBI issues stricter norms to prevent client securities misuse

25.02.2020

In order to prevent the misuse of client’s securities by broker, the Security and Exchange Board of India (SEBI) has issued a circular tightening the norms. The misappropriation or misuse includes use of one client's securities to meet the exposure, margin or settlement obligations of another client or of the Trading Members (TM) or Clearing Member (CM). The Regulations will come in effect from 1st June, 2020. The Circular is issued in exercise of powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act, 1992 to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.

Section 12 of the Depositories Act, 1996 read with Regulation 79 of the SEBI (Depositories and Participants) Regulations, 2018 and the relevant Bye Laws of the Depositories clearly enumerate the manner of creating pledge of the dematerialised securities. Any procedure followed other than as specified under the aforesaid provisions of law for creating pledge of the dematerialised securities is prohibited. It is clarified that, an off-market transfer of securities leads to change in ownership and shall not be treated as pledge. Transfer of securities to the demat account of the TM / CM for margin purposes (i.e. title transfer collateral arrangements) shall be prohibited. In case, a client has given a power of attorney in favour of a TM / CM, such holding of power of attorney shall not be considered as equivalent to the collection of margin by the TM / CM in respect of securities held in the demat account of the client.

With effect from June 01, 2020, TM (Trading Member) / CM (Clearing Member) shall accept collateral from clients in the form of securities, only by way of ''margin pledge'', created in the depository system in accordance with relevant provisions. TM / CM are prohibited from holding any client securities in any beneficial owner accounts of TM/CM, other than specifically tagged accounts. To devise a framework that mitigates the risk of misappropriation, SEBI had extensive consultations with Stock Exchanges, Clearing Corporation and Depositories and industry representatives of TM, CM and Depository Participants (the "DP")

Tags : Client securities Misuse Norms

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