Securities and Exchange Board of India (SEBI) vide notification no. SEBI/HO/MIRSD/DoP/P/CIR/2022/143dated 27th October, 2022in exercise of powers conferred under Section 11(1) of theSecurities and Exchange Board of India Act, 1992, and Section 19 of the Depositories Act, 1996, to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, has issued a Clarification on "Block Mechanism in Demat account of clients undertaking sale transactions".
SEBI has clarified that the block mechanism shall not be applicable to clients having arrangements with custodians registered with SEBI for clearing and settlement of trades.
The Circular was issued to:
- All Depositories
- All recognized Stock Exchanges and Clearing Corporations
Applicability
The status of the implementation of the provisions of this circular on November 15, 2022 and in their Monthly Development Reports.
The block mechanism
Under the block mechanism, securities lying in the client's demat account will be blocked either by the client using a depository's online system or eDIS mandate or through the depository participant based on physical DIS (Delivery Instruction Slip) given by the client or Power of Attorney (PoA) holder.
Depositories can block the securities in the client's demat account in respect of intra or inter-depository transfer instruction till pay-in day. Only after reviewing the client-level net delivery obligation obtained from clearing corporations can the blocked securities be transferred.
Depositories will also provide clearing organisations with information on transfer orders so that clients can take advantage of the early pay-in benefit.
According to Sebi, if securities for sale are blocked in the depository system in favour of a clearing corporation, all margins would have deemed to have been collected and penalty for short or non-collection of margins, including other margins should not arise.
Key Highlights
- SEBI, vide circular no. CIR/HO/MIRSD/DOP/P/CIR/2022/595 dated July 16, 2021,introduced block mechanism in the demat account of clients undertaking sale transactions, for ease of operations in Early Pay-in mechanism. The mechanism was introduced on an optional basis.
- Subsequently, vide circular no. SEBI/HO/MIRSD/DoP/P/CIR/2022/109 dated August 18, 2022, SEBI made the facility of block mechanism mandatory for all Early Pay-In transactions.
- Clarification received from SEBI: It is clarified that the block mechanism shall not be applicable to clients having arrangements with custodians registered with SEBI for clearing and settlement of trades.
- Stock Exchanges and Depositories are directed to bring the provisions of this circular to the notice of their members/participants and also disseminate the same on their websites; and make necessary amendments to the relevant Bye-laws, Rules and Regulations for the implementation of the above decision.
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