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SEBI's New Rules for Direct Payout of Securities: What Investors Need to Know

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Published Date: 29 Dec 2024Updated Date: 29 Dec 20246 mins readBy MOFSL

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Introduction

After you buy stocks, there are multiple systems that collaborate to add the stocks to your demat account. Although it may appear that the crediting of your shares to your demat account occurs quickly, this is not the case. It’s a lengthy process and many hands are involved.

In an effort to streamline and improve the payout process in the stock market and to increase security, the Securities and Exchange Board of India (SEBI) has introduced new regulations. The guidelines define a new direct payout method that makes the role of a middleman redundant in the settlement process.

This blog will delve into the changes, the process, and the implications for investors like you.

What’s the Current Process?

The current procedure calls for the clearing corporation (CC) to deposit funds into your broker's pool account prior to releasing any purchased securities. After that, the broker will move the assets to your demat account. Despite its functionality, this procedure adds administrative burdens and might cause delays. SEBI hopes to fix this with the direct payout system.

What is the Direct Payout System?

With the direct payout method, there is no longer any need to send securities to a broker. Your demat account will instead receive the securities, making the process faster, secure, and efficient.

Key Highlights:

The clearing corporation directly credits the accounts of the investors.
Two stages of implementation to make sure the change goes smoothly.
Brokers' involvement in settlement and clearing processes is minimised.

Implementation Timeline

There are two stages to the direct payout system's rollout:

Phase 1

The first phase began on November 11, 2024 (with an extension from October 14, 2024).
The end date for this project is January 13, 2025.
Applicable: Physical settlements and equity cash.
Exceptions: The broker's account will still be temporarily involved in inactive demat accounts, rejected payouts, or excess pay-ins.

Phase 2

The second phase will begin on January 14, 2025.
Applicable: Everything having to do with the sale or borrowing of securities, Securities Lending and Borrowing (SLB), and Offer for Sale (OFS).
Additional Change: The clearing corp will take care of the settlements for short deliveries in auctions, further minimising the trading broker's role.

What Changes for Investors?

In order to simplify the payout procedure, SEBI's guidelines have introduced various changes:

Direct Payout of Funds for Settlement

During the net settlement procedure, the clearing corporation will connect sellers and buyers directly. The trading broker will no longer be liable for buying shares from the stock market as the clearing corp will handle any delivery shortage through auctions or close-out pricing.

Pledged Shares

Due to outstanding balances or margin trading, a trading broker will no longer undertake the process for pledged shares. Investors also have the option of having their demat account marked as pledged for the shares by requesting this action from the clearing corporation. By reducing the broker's role, this move creates a pledging process that is safer and fairer.

How Does This Impact Investors?

Without adding any added burden for investors, the new rules aim to make things more secure and efficient. In this way, they help you with:

Enhanced Security: Errors, negligence, and forgery are far less likely to occur when the trading broker is not involved as much.
Optimised Processes: Receive your funds more quickly and reliably with direct credit to your demat account, which optimises the transfer procedure.
Transparency: When agents are not as involved, the settlement process is easier to understand, which creates better trust in the system.
No Extra Costs: The transition to SEBI's new standards is smooth because investors are not required to pay any extra money or meet any additional requirements.

Why Do These Changes Matter?

The direct distribution system is a substantial stride towards the modernisation of India's securities market infrastructure. By reducing intermediaries and eliminating unnecessary processes, SEBI is enhancing the efficiency and investor-friendliness of the system. These updates are in line with SEBI's larger goals of making the stock market more secure for investors and easier for everyone to use.

Conclusion

The implementation of SEBI's direct payout mechanism is transformative for investors and the securities industry. This method speeds up the settlement process, makes it safer, and makes sure that investors' demat accounts get securities faster by getting rid of the broker's middleman role.

These modifications will establish a more transparent and efficient ecosystem for investors over the course of a phased implementation that commenced in November 2024. As SEBI continues to transform the Indian securities market, watch this space for future updates.