The Securities and Exchange Board of India (SEBI) has rolled out a set of groundbreaking regulations aimed at transforming the landscape of the Indian stock market. This initiative focuses on enhancing transparency and efficiency, specifically in how securities are credited to investors’ demat accounts. These reforms are designed to streamline the settlement process, reduce reliance on intermediaries like stockbrokers, and bolster security for investors.
Scheduled to take effect in two distinct phases, starting October 14, 2024, these regulations will facilitate the direct credit of securities into investors’ demat accounts immediately following a trade. This marks a significant shift from the current system, where brokers play a central role in the settlement process, often resulting in delays and added complexity.
Nithin Kamath, Founder and CEO of Zerodha, underscored the significance of this development. He stated that this transition to direct credit through a net settlement process will greatly simplify operations for Depository Participants (DPs).
“SEBI is not just tightening the rules for market safety; it’s also simplifying the operational frameworks. From October 14th onward, shares purchased will go straight into the customer’s Demat account via net settlement. This incredible change eases the DP process, which currently involves brokers collecting shares and distributing them based on individual client purchases, termed gross settlement,” Kamath shared in a post on X (formerly Twitter).
He further elaborated that the new structure will enhance security measures by completely removing brokers’ access to client securities during the settlement timeframe.
“With this system, brokers will no longer be able to access client securities during transactions, a vulnerability present in the current model before shares are credited to Demat accounts,” Kamath emphasized, highlighting the improved safety features for investors.
In his detailed blog post, Kamath provided insights on how the new regulations will affect both investors and brokers, clarifying that while many changes will occur behind the scenes, the net benefit will be noticeable.
Understanding the Current Process
Traditionally, after securities are purchased, they are initially credited to the broker’s pool account by the Clearing Corporation (CC). From there, brokers are responsible for transferring these securities to the buyer’s demat account, thereby controlling the assets until the final transfer is executed, which can sometimes lead to delays and inefficiencies.
While a “direct payout for net settlement” method exists—where securities are matched between buyers and sellers for some transactions—complications such as short delivery still require brokers to engage in resolution processes, which can include market purchases or auctioning off the shares.
Planned Changes with SEBI’s New Guidelines
SEBI’s new guidelines intend to overhaul this conventional process, enabling the CC to credit securities straight into investors’ demat accounts. This minimizes the broker’s intermediary role and aims to enhance the overall efficiency of the market. The rollout will occur in two phases:
Phase 1: October 14, 2024 – January 13, 2025
The first phase will introduce direct credit for transactions in the equity cash segment and for physical settlements. However, specific situations—such as rejected payouts, dormant accounts, or excess securities from clearing members—may still see securities temporarily credited to the broker’s pool account.
Phase 2: From January 14, 2025
The second phase will extend direct securities credit to all transaction types, including Securities Lending and Borrowing (SLB) and Offer for Sale (OFS) transactions. This phase aims to further reduce broker involvement in settlements while the CC will directly oversee auction settlements for short deliveries, removing the need for brokers to participate in auction processes.
Transformations in the Pledge Process
Presently, when investors buy securities using margin trading facilities (MTF) or otherwise, brokers manage its pledging—marking assets as pledged until full payment is secured.
With the new SEBI guidelines, this responsibility will shift. Brokers will instruct the Clearing Corporations to mark pledges directly in the clients’ demat accounts if full payment isn’t completed, thus ensuring a more transparent and secure transaction environment.
Implications for Retail Investors
Importantly, these sweeping changes will not directly affect retail investors. Most adjustments will transpire behind the scenes, requiring no additional action on their part. The primary purpose of direct credit is to enhance the settlement process, mitigating delays while bolstering the safety of client assets.
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