SEBI Automates Pledge Invocation and Sale to Ease Operations, Address Unsold Share Accumulation

Market regulator the Securities and Exchange Board of India on Tuesday said that the invocation and sale of pledged shares will be a combined automated process, and this will facilitate ease of doing business as well as safeguard the interest of investors. The move comes after the regulator found that the pledged shares were lying unsold getting accumulated in demat account of brokers. Hence, the said accumulation does not serve the purpose for which pledge was invoked i.e. realisation of moneys, SEBI said.

Besides the issue of inactivity, brokers also faced operational difficulties when clients sell pledged securities, as it required multiple steps like unpledge and delivery, sometimes using physical or digital instructions or power of attorney.

To make the process operationally efficient, the market regulator said that for client-initiated sales, depositories will now allow a single instruction to release the pledge and block the securities for early pay-in directly from the client's demat account, thus eliminating the need for manual instructions.

The new provisions included in the circular dated June 3, will come into effect on September 5, while depositories are required to issue detailed operational guidelines by July 1.

In the case of broker-initiated invocation, the shares excluding unlisted mutual funds will be automatically blocked for early pay-in from the client's demat account, the SEBI circular said. “…shall be blocked for early pay-in in the client’s demat account with a trail being maintained in TM/CM’s ‘Client Securities Margin Pledge Account’ / ‘Client Securities under Margin Funding Account’,” the circular said.

For unlisted mutual funds, 'invocation cum redemption' mechanism is introduced where the invoked mutual funds units will come to the go for auto redemption from the said account, thus simplifying operations and reducing delays.

The SEBI circular also said that the invoked securities from frozen or blocked client accounts will be transferred to the broker's demat account. Further, to prevent unnecessary accumulation, brokers are required to sell these securities on the same day under their proprietary code, the circular said.