Come October 14, 2024 and the facility of direct credit of securities into client account will kick start. The investors will be able to receive securities directly into their account from Clearing Corporation of India. The broking intermediaries will have no say in credit of securities until and unless there is default in payment or there is short/excess delivery or dormancy of demat account etc. These provisions are prone to be mis-utilized until the regulators educate clients about difference between back office holding and demat holdings, encourage them to check their demat account holdings through IDeAS and SPEED-e facilities, equip them with SMS/WhatsApp based facility to check demat holding, develop IVR based system to cross check demat holding and plan surprise audit of brokers’ pool account. Let us discuss the new provision, the loopholes in new/existing provisions and the ways to strengthen the framework.
The existing framework: When one buys some securities and pays for it, the securities land in the pool account of broker. The pool account of broker is a demat account declared to the Clearing Corporation of India for settlement of securities of its clients. The Clearing Corporation credits securities of all the clients into Pool Account. Once the securities are credited into pool account, the broker has the responsibility of crediting securities into the account of clients. As such there are seven types of demat account to be maintained by a stock broker: 1. Pool account (TM/CM – Pool account) 2. Own Beneficiary Account (Stock Broker-Proprietary Account) 3. Client Unpaid Securities Account 4. Client Margin Trading Securities account (In case of Margin trading) 5. Early Pay-in Account (In case of CDSL) 6. Client collateral Account (for holding client securities for margin purpose and onward transfer to Collateral Account for pledging with Clearing Corporations or transfer to Clearing Member) and 7. Collateral account (for pledging own & client securities with CCs or transfer to Clearing Member). In this write up, our focus area is Pool Account.
The menace of Pool Account: The pool account is pool of securities, wherein securities of the all the clients of a broker land from Clearing Corporation. There is always a time lag in settlement of securities, I mean transfer of securities from pool account to client account. The facility of BTST (Buy Today, Sell Tomorrow) and STBT (Sell Today, Buy Tomorrow) has been encouraging transmission lag. The ignorance of investors is also a reason behind this. An investor can hardly differentiate between demat account and brokers’ back office. The back-office software is maintained by the broker and the digits are fed manually. Once you log into the back office a broker, you find the shares reflecting there. In most of the cases, these are illusive entries, which don’t exist. Once you sell the shares, the shares are transferred from the pool account itself and the entry in back office is updated. In some cases, these pool account stocks have been used by the broker to settle his own liability. The broker may pledge these shares with Clearing Member or Non- Banking Finance Companies (NBFCs) to raise margin/loan. In a falling market the broker may sell shares from pool account and may buy the same at a lower price to earn benefit. All these activities have been part and parcel of pool account. You may find numerous such violations at SEBI’s website, where SEBI has caught the wrong doers. Recent example is that of stock broking firm Karvy, wherein clients’ securities were used to avail loan from banks.
Back-office vs Demat account: Every broker has a back-office software. Shilpi is the market leader in this segment. There are more than a dozen back-office vendors approved by NSE. These have almost similar software platforms. In some instances of fraud, the brokers were found to be maintaining two different back offices and maintaining two different servers. One was manually fed and showcased to clients whereas the other was maintained for audit purposes. In trending stock market, the brokers have been earning through contra positions based on pool market holding. The regulators should educate clients that back office holding and demat account holdings are two different things. The clients should be encouraged to check their demat account holdings through IDeAS and SPEED-e facilities. There must be SMS/WhatsApp based facility to check demat holding. A depository helpline should be created with IVR facility to cross check demat holding. The NSDL Audit takes place at a defined period. The periodicity of audit should be increased and surprise audit should be planned. These measures will strengthen the SEBI framework regarding direct credit of securities in client account.
SMS Aaya Kya? (Did u receive SMS): One must pay attention to the SMS received from the depository duo NSDL & CDSL. If you buy some shares, you must receive a credit SMS from NSDL/CDSL. If you sell some shares, you must receive a debit SMS from NSDL/CDSL. If you don’t receive such SMS, you must raise an alarm. The direct credit regime is not free from loopholes either. In case of direct credit of securities into demat account, the provision related to excess securities, shortage of fund, dormant demat account, non-existent demat account and error in demat account are prone to be misused to take delivery in pool account. SEBI has been smart enough to order that securities bought under MTF (Margin Trading Facility) will be directly credited into client account and lien will be marked by Clearing Corporation at the request of stock broker.
In brief, the direct credit of securities into client account is a much-awaited regulatory move. It should be strengthened further by plugging loopholes, educating investors and planning surprise audits.
