The Securities and Exchange Board of India (SEBI) on December 28, 2023, approved an extension in the settlement period for clients' running accounts by brokers, now allowing settlement on Fridays and Saturdays of every month or quarter. This decision aims to streamline the settlement process, benefiting both investors and brokers while ensuring error-free transactions.
What Is The Change?
Initially, Sebi had mandated the settlement of the running account of client funds on the first Friday of every quarter or month, emphasising the protection of investor interests. So until now, clients' unutilised funds lying in the trading account had to be transferred back to clients' bank accounts on the first Friday of every quarter or every month as opted by clients. However, this single-day settlement led to operational challenges which were highlighted by the Broker's Industry Standards Forum (ISF), including hectic activities on the day of settlement leading to chances of errors, missing out on payment timings of banks due to late finalisation, delayed instructions, etc
Sebi's Decision and Implications
Considering these concerns raised by the Broker's ISF, Sebi extended the settlement window to Fridays and/or Saturdays. This streamlines the process of settlement and ensures ease of doing business for various stakeholders viz. stock brokers and banks, while at the same time safeguarding the interests of the investors by ensuring error-free settlement.
Under the new rules, Trading Members (TMs) can now settle clients' running accounts on Fridays and/or Saturdays based on the choice of the clients on quarterly and monthly basis, on the dates stipulated by the Stock Exchanges. The move is expected to reduce chances of errors, missing out on payment timings of banks due to late finalisation, delayed instructions, etc.
To ensure uniformity and clarity on dates of settlement, Stock exchanges should jointly issue the annual calendar for the settlement of running accounts (quarterly and monthly) at the beginning of the financial year. Additionally, to prevent misuse of clients' funds for other accounts, Sebi has mandated that all received client funds remain in the upstreaming account.
As per an earlier Sebi release, "no clients’ funds shall be retained by SBs/ CMs on End of Day (EoD) basis. The clients’ funds shall all be upstreamed by SB/ CMs to CCs only in the form of either cash, lien on FDR ), or pledge of units of Mutual Fund Overnight Schemes (MFOS)" "TM shall ensure that funds, if any, received from clients, whose running account has been settled, remain in the “Up Streaming Client Nodal Bank Account” and no such funds shall be used for settlement of running account of other clients. Stock Exchanges shall evolve a monitoring mechanism for this purpose,” the news release said.
These provisions are applicable for the quarterly settlement of January to March 2024 and the monthly settlement of January 2024. Stock Exchanges are directed to monitor the timely settlement of the running account for funds of the client and to verify that excess clients’ funds are not retained by the TM as of the date of settlement of the running account. They are also required to establish an appropriate reporting mechanism by TM to enforce the above provisions.
