SEBI has now set a new process for brokers to take shares as margin from clients. From June 1, shares of clients lying in Demat accounts with brokers will have to be specifically marked ‘shares pledged for the purpose of margin’. So far, the practice did not require any such specific pledge and merely shares lying in clients’ Demat accounts held by brokers were considered for the purpose of margin.
“Transfer of securities to the Demat account of the trading member / clearing member (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. Depositories shall provide a separate pledge type, viz. ‘margin pledge’, for pledging client’s securities as margin to the TM / CM. The TM / CM shall open a separate Demat account for accepting such margin pledge, which shall be tagged as ‘Client Securities Margin Pledge Account,” SEBI said on Tuesday.
Till now, most brokers did not require any special permission from clients to further pledge their shares as they already held the power of attorney (POA) for the Demat accounts. It is this POA that was being misused by brokers. The cases involving Karvy and certain other brokers who took their clients’ share through this POA are cases in point.
SEBI has now declared that for the purpose of providing collateral in the form of securities as margin, a client shall pledge securities with TM, and TM shall re-pledge the same with CM, and CM in turn shall re-pledge the same to Clearing Corporation (CC). The complete trail of such re-pledge shall be reflected in the de-mat account of the pledger. The TM shall re-pledge securities to the CM’s ‘Client Securities Margin Pledge Account’ only from the TM’s ‘Client Securities Margin Pledge Account’. The CM shall create a re-pledge of securities on the approved list to CC only out of ‘Client Securities Margin Pledge Account.’ In this context, re-pledge would mean endorsement of pledge by TM / CM in favour of CM/CC, as per procedure laid down by the depositories.
“The procedure of margin collection in terms of shares has been made lengthy by SEBI but it may curb POA abuse,” said a Mumbai-based broker.
SEBI has said that the TM and CM shall ensure that the client’s securities re-pledged to the CC will be available to give exposure limit to that client only. Meaning, the brokers will not be able to further pledge those shares. Dispute, if any, between the client, TM / CM with respect to pledge, re-pledge, invocation and release of pledge shall be settled inter-se amongst client and TM / CM through arbitration as per the bye-laws of the depository. CC and depositories will not be held liable for the same, SEBI has said.
Each TM / CM may have their own list of acceptable securities that may be accepted as collateral from client. Funded stocks held by the TM / CM under the margin trading facility shall be held by the TM / CM only by way of pledge. For this purpose, the TM / CM will be required to open a separate Demat account tagged ‘Client Securities under Margin Funding Account in which only funded stocks in respect of margin funding shall be kept/ transferred, and no other transactions shall be permitted. The securities lying in ‘Client Securities under Margin Funding Account’ will not be available for pledge with any other bank/ NBFC, SEBI has said.
The TM / CM will be required to close all existing Demat accounts tagged as ‘Client Margin/ Collateral’ by June 30, 2020. The TM / CM will be required to transfer all clients’ securities lying in such accounts to the respective client Demat accounts. Thereafter, TM / CM are prohibited from holding any client securities in any beneficial owner accounts of TM/CM, other than specifically tagged accounts, as per SEBI.