The Security and Exchange Board of India (SEBI) has issued a circular and tighten the norms to prevent the misuse of clients’ securities available with the intermediaries.
The circular was issued on February 25, 2020, in the name of D. Rajesh Kumar, General Manager in order to prevent the misuse of securities, the Market Regulator, Security, and Exchange Board of India (SEBI) had consultation with Stock Exchange, Clearing Corporation and Depositories and industries representative of Trading Members, Depository Participants to devise a framework that mitigates the risk of misappropriation or misuse of client’s securities available with intermediaries.
The circular was addressed to all the recognized Stock Exchanges, recognized clearing corporations and all depositories. The regulations will take effect from June 01, 2020. This circular prohibited the transfer of securities to the Demat Account of the Trading Members (TM) or Clearing Member (CM) for the margin purposes i.e title transfer collateral agreements.
The circular also stated that in case, a client has given a power of attorney in favor 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.
Thus SEBI banned the transfer of clients’ securities to Demat accounts of trading and clearing members. This was the step taken against the backdrop of Karvy Stock Broking Ltd (KSBL) incident wherein in the month of November the KSBL from taking new brokerage clients after it was found that the brokerage firm had allegedly misused client’s securities to the tune of more than Rs 2,000 crore, the watchdog has now put in place by passing stringent norms to prevent misuse of clients’ securities that are available with trading and clearing members and depository participants.
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