Market regulator Sebi on Tuesday banned the transfer of clients’ securities to the demat accounts of trading and clearing members.

Against the backdrop of Karvy Stock Broking Ltd (KSBL) incident, the watchdog has now put in place stringent norms to prevent misuse of clients’ securities that are available with the trading and clearing members, and depository participants.

“With effect from June 01, 2020, TM (Trading Member) / CM (Clearing Member) shall, inter alia, accept collateral from clients in the form of securities, only by way of ‘margin pledge’, created in the depository system...,” the circular said. In November, the watchdog barred KSBL from taking new brokerage clients after it was found that the brokerage firm had allegedly misused clients’ securities to the tune of more than Rs 2,000 crore.

The new framework has been devised after extensive consultations with stock exchanges, clearing corporations, depositories and industry representatives of the trading and clearing members, and depository participants, according to a circular.

“With effect from June 01, 2020, TM (Trading Member) / CM (Clearing Member) shall, inter alia, accept collateral from clients in the form of securities, only by way of ‘margin pledge’, created in the depository system...,” the circular said.

In November, the watchdog barred KSBL from taking new brokerage clients after it was found that the brokerage firm had allegedly misused clients’ securities to the tune of more than Rs 2,000 crore.

On February 17, Sebi chief Ajay Tyagi said it would soon come out with a circular to prevent incidents such as KSBL. “Transfer of securities to the demat account of the TM / CM for margin purposes (ie. title transfer collateral arrangements) shall be prohibited.

“In case, a client has given a power of attorney in favour of a TM / CM, such holding of power of attorney shall not be considered as equivalent to the collection of margin by the TM / CM in respect of securities held in the demat account of the client,” the circular said.

Bond regulation

Amid rising instances of defaults, markets regulator Sebi on Tuesday proposed a stronger framework for governing corporate bonds and debenture trustees, including enhanced disclosure requirements.

Among other measures, the watchdog has suggested that NBFCs (Non-Banking Financial Companies) create a charge on the identified assets for every bond issue.

Sebi has issued a consultation paper on ‘Review of the Regulatory Framework for Corporate bonds and Debenture Trustees’. “The increased events of default by a few financial institutions and the lapses/ complications on the part of debenture trustees in the expeditious enforcement of the security has brought to the fore the need for a review of the present regulatory framework for debenture trustees,” Sebi said.