The Securities and Exchange Board of India (“SEBI”) has recently issued a circular amending the settlement period for clients' funds or securities held by stockbrokers. The existing compliance requirement mandates settlement on the first Friday of every quarter, creating operational challenges for brokers. In response to industry concerns, SEBI has relaxed this requirement, allowing settlement on either the first Friday or Saturday of the quarter or month. The circular will be effective from the quarterly settlement of January-March 2024 and monthly settlement of January 2024.
Background
SEBI, in 2018, mandated the settlement of clients' funds on the first Friday of each quarter or month to protect investor interests. However, the Broker's Industry Standards Forum (“ISF”) highlighted the challenges faced by brokers due to a single settlement day. These challenges included hectic activities, potential errors, and difficulties with bank payment timings. The ISF recommended allowing brokers to settle running accounts on Fridays and/or Saturdays to address these operational issues. SEBI, after careful consideration, has accepted this recommendation to streamline the settlement process.
Key Changes in the SEBI Circular
The circular modifies Clause 47.1.1 of the SEBI Master Circular, stating that trading members (“TMs”) can now settle the running accounts of clients on a quarterly and monthly basis on dates stipulated by the stock exchanges. This change offers flexibility by allowing settlement on either the first Friday or Saturday, addressing operational difficulties faced by brokers.
Moreover, to ensure uniformity and clarity in settlement dates, SEBI has directed stock exchanges to jointly release an annual calendar for both quarterly and monthly settlement at the beginning of each financial year. This step aims to provide stakeholders with a clear schedule, promoting transparency and consistency.
Furthermore, to prevent the misuse of clients' funds, the circular introduces Clause 47.1.3, which mandates that funds received from clients, whose running accounts have been settled, must remain in the "Up Streaming Client Nodal Bank Account". This restriction ensures that funds from one client are not used to settle another client's running account. Stock exchanges are tasked with developing a monitoring mechanism to enforce this directive.
Implementation and Applicability
The circular is set to be applicable from the quarterly settlement of January-March 2024 and the monthly settlement of January 2024. All other provisions under Clause 47 of the circular dated May 17, 2023, will continue to remain applicable. Stock exchanges are directed to disseminate the circular to their members, make necessary amendments to bye-laws, rules, and regulations, and issue operational guidelines and calendars for settlement. Additionally, they are required to conduct online monitoring of timely settlement, enforce reporting requirements, and communicate the status of implementation to SEBI.
Our Take
SEBI's recent circular marks a significant step toward addressing operational challenges faced by brokers in the settlement of clients' funds. By allowing flexibility in settlement dates and introducing safeguards against fund misuse, the regulatory body aims to enhance efficiency, reduce errors, and protect investor interests. The implementation of these changes, along with the proactive role assigned to stock exchanges, is expected to contribute to a smoother settlement process in the Indian securities market.
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