Sebi introduces auto-pledge framework for unpaid client securities. What does it mean for investors?

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The Securities and Exchange Board of India (Sebi) on Friday introduced a comprehensive regulatory framework governing the treatment of clients' unpaid securities by trading members (TMs), bringing in an auto-pledge mechanism while strengthening safeguards to protect investors.
Under the new framework, securities purchased outside the Margin Trading Facility (MTF) that remain unpaid will continue to be credited directly to the client's demat account. However, instead of retaining these securities, an automatic pledge will be created in favour of a dedicated account maintained by the trading member, known as the Client Unpaid Securities Pledgee Account (CUSPA), without requiring any separate consent or instruction from the client. The pledge will be distinctly tagged as "unpaid" in accordance with Sebi's regulations.
Following the creation of the pledge, trading members must promptly notify clients through email or SMS regarding their outstanding payment obligation and inform them of the TM's right to liquidate the pledged securities if the dues remain unpaid, Sebi said in a circular.
The market regulator has also instructed trading members to establish and maintain a formal policy for dealing with unpaid securities. This policy may either be a standalone document or incorporated into the firm's broader risk management framework, provided it complies with Sebi's circular and operational guidelines issued by stock exchanges.
Before implementation, the policy must be shared with clients. It should clearly define the circumstances, process and timelines for invoking or releasing pledges, as well as the procedure for liquidating unpaid securities. Additionally, the policy must specify the maximum period allowed for clients to fulfil their payment obligations, which cannot exceed five trading days from the pay-out date.
Although securities pledged in the TM's CUSPA account can be counted for reporting client margin collection to the Clearing Corporation, Sebi clarified that trading members cannot extend any additional trading exposure against these pledged securities.
For as long as a client's payment remains outstanding, trading members must calculate on a daily basis the maximum value of securities that can remain under pledge, taking into account the client's ledger balance and total margin obligations.
If the value of pledged securities exceeds the permissible threshold, the trading member must release the excess pledged quantity by the following trading day in line with exchange guidelines. In cases where the client does not clear the outstanding dues within the prescribed period, the TM will invoke the pledge and liquidate the securities in accordance with its approved policy after providing reasonable notice to the client.
Once the pledge is invoked, the securities will be blocked for early pay-in in the client's demat account while ensuring a complete audit trail is maintained through the TM's CUSPA account.
Sebi said depositories will verify the blocked securities against the client's obligations before they are sold in the market using the respective client's Unique Client Code (UCC). Any surplus remaining after settling the client's dues will be credited back to the client's ledger.
If a pledge is neither invoked nor released within five trading days from the pay-out date, depositories will automatically release it at the close of the sixth trading day. The securities will then become freely available in the client's demat account without any encumbrance. Trading members, however, may voluntarily release the pledge before the automatic release takes effect.
The regulator has also barred trading members from using securities held in the CUSPA account as collateral with banks or non-banking financial companies (NBFCs) to raise funds.
At the same time, Sebi has permitted an extension of the pledge in exceptional situations where liquidation cannot be completed within the stipulated five trading days. Such circumstances include securities hitting the lower circuit with only sellers available, trading suspensions or halts due to surveillance actions, or any other valid reasons recognised by market infrastructure institutions (MIIs), including unforeseen events beyond the trading member's control.
In these cases, trading members may apply for an extension of up to one additional calendar week by submitting a request before 6 pm on the fifth trading day after pay-out. Additional extensions of the same duration may be sought only if the exceptional circumstances continue.
Once the exceptional conditions no longer exist, no further extension will be allowed. Trading members must notify clients each time an extension is granted. If an extension request is not submitted within the prescribed deadline, the pledged securities will be automatically released through a system-driven process.
To facilitate implementation, Sebi has directed stock exchanges to issue detailed operational guidelines, in consultation with depositories, within 30 days from the date of the circular.
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