SEBI Revises Framework for Clients’ Unpaid Securities

SEBI has revised the framework for handling clients’ unpaid securities to streamline the process followed by Trading Members where clients fail to meet their payment obligations.

Under the revised framework, for non-Margin Trading Facility (non-MTF) trades, securities will be credited to the client’s demat account and automatically pledged in favour of the Trading Member’s Client Unpaid Securities Pledgee Account (CUSPA).

1. Auto-Pledge of Unpaid Securities

In non-MTF trades, where securities are unpaid, such securities will be credited to the client’s demat account and auto-pledged in favour of the Trading Member’s CUSPA.

This mechanism ensures that the securities remain linked to the client and secures the Trading Member’s exposure until the payment obligation is fulfilled.

2. Policy for Handling Unpaid Securities

Every Trading Member is required to formulate and maintain a policy for handling unpaid securities.

The policy may be maintained either:

• On a standalone basis, or
• As part of the Trading Member’s Risk Management Policy.

The policy must be communicated to all clients before implementation.

3. Contents of the Policy

The policy must clearly specify the processes relating to unpaid securities, including:

• Reasons for invocation or release of pledge;
• Manner of invocation or release;
• Timing of pledge invocation;
• Process for liquidation of unpaid securities; and
• Timeline within which the client must meet payment obligations.

4. Maximum Timeline for Client Payment

The policy must specify the maximum period within which the client must meet the payment obligation.

Such period must not exceed five trading days from the pay-out date.

5. Invocation and Liquidation of Pledge

If the client fails to meet the payment obligation within the prescribed timeline, the Trading Member may invoke the pledge and liquidate the unpaid securities.

However, such invocation and liquidation must be carried out in accordance with the Trading Member’s policy.

6. Reasonable Notice to Client

Before invoking the pledge and liquidating the unpaid securities, the Trading Member must give the client reasonable notice.

This requirement is intended to ensure transparency and provide the client an opportunity to meet the outstanding payment obligation.

7. Sale of Unpaid Securities

The unpaid securities must be sold on the market using the respective client’s Unique Client Code (UCC).

This ensures that the sale is properly identified and linked to the concerned client.

8. Treatment of Surplus Funds

Where any surplus funds remain after settling the client’s payment obligation, such surplus must be credited to the client’s ledger.

This ensures that the Trading Member retains only the amount required to recover the outstanding dues.

9. Daily Review of Pledges

Trading Members are required to review pledges daily.

This is intended to ensure that pledges are monitored regularly and released or invoked in accordance with the applicable framework.

10. Auto-Release and Limited Extensions

The revised framework also provides for the automatic release of pledges when payment obligations are fulfilled.

Limited extensions may be permitted in exceptional cases, subject to the conditions prescribed under the framework and applicable exchange guidelines.

11. Restriction on Use of CUSPA Securities

SEBI has clarified that securities pledged in favour of the Trading Member’s Client Unpaid Securities Pledgee Account (CUSPA) must not be pledged or transferred to banks or NBFCs for raising funds.

This restriction is intended to protect client securities and prevent their misuse for financing purposes.

12. Objective of the Revised Framework

The revised framework seeks to:

• Provide a structured mechanism for handling unpaid securities;
• Protect client interests;
• Ensure transparency in pledge invocation and liquidation;
• Strengthen risk management by Trading Members;
• Prevent misuse of client securities; and
• Bring uniformity in the treatment of unpaid securities.

13. Key Takeaway

SEBI has revised the framework for handling clients’ unpaid securities. In non-MTF trades, unpaid securities will be credited to the client’s demat account and auto-pledged in favour of the Trading Member’s CUSPA. Trading Members must maintain a clear policy, notify clients, review pledges daily, provide reasonable notice before liquidation and ensure that surplus funds are credited to the client’s ledger. Securities pledged under CUSPA cannot be used to raise funds from banks or NBFCs.