Sebi forced the new norms as several brokers used the shares of dormant or inactive clients to provide margins for other more active clients.
The Securities and Exchange Board (Sebi) has come up with a new margin pledge norms. The action has been taken against several brokers for misusing their client securities. The new system came into regulation on September 1, 2020. Although, the norms were supposed to be effective on August 1, however, Sebi postponed the implementation by a month. Meanwhile, the market regulation was managed with both old and new systems running in parallel.
Sebi forced the new norms as several brokers used the shares of dormant or inactive clients to provide margins for other more active clients. The brokers obtained the power of attorney from the clients to access their accounts. A POA paved a way for the broker to move client securities from the Demat account to a collateral account, which is further access to both the broker as well as a client. Due to this, Some brokers have even raised money by pledging shares in the collateral account and used it to fund other businesses. This triggered Sebi to reimplement the entire system with new regulations.
With the new system of Sebi, brokers will not have direct access to client securities.CDSL and NSDL have developed software for pledging and repledging Demat holdings directly by clients. Whenever clients have to generate margins, they will now be directed to the webpage of the depository which will require OTP authentication for the clients to be able to see their holdings.