SEBI issued new standards to prevent misuse of consumer securities

Mumbai, Ta. 26 February 2020, Tuesday

According to the Securities and Exchange Board of India (SEBI), the regulator of the capital markets, brokers will be able to accept collateral from customers in the form of securities through margin mortgages in the depository system. Sebi has taken this step after the recent incident of carving stock broking. It alleges that the shares of clients were raised by broking firm banks and non-banking finance companies through illegal mortgages.

Sebi has clarified that ownership of off-market securities transfers changes ownership and should not be considered a mortgage. Sebi stated in a circular that transfer of securities to the trading member and the clearing member's demat account for margin purposes (transfer collateral arrangement) would be prohibited. In the case where the power of attorney has been granted by the client in favor of the trading member or the clearing member, the power of attorney cannot be treated as a margin consolidation by the trading member or the clearing member in relation to the securities held in the customer's demat account.

The SEBI has made it more clear that the broker should provide a separate mortgage-type mortgage for mortgage securities as a margin. Brokers will need to open a separate demat account to accept a mortgage pledge. Which will be known as client securities margin pledge account.

For the purpose of providing collateral as a margin in the form of securities, the client shall mortgage with the trading member and the trading member shall re-pledge the clearing member and the clearing member shall perform the re-pledge clearing corporation.