Transparency has always been a top priority for the Securities and Exchange Board of India (SEBI) to make the markets safe for all investors. Since its incorporation in 1988, SEBI has introduced several measures to improve the transparency of the capital markets and protect the interest of investors.
A similar set of rules is being implemented by SEBI starting from 14th October 2024, which will slightly reduce the roles and responsibilities of the brokers in the stock market.
What is the New Direct Payout Rule?
According to the new direct payout rule introduced by SEBI, the securities or stocks purchased by the investors will directly get credited to the investor’s demat account by the clearing corporation (CC).
Previously, the securities were first credited to the broker’s pool account and then they were transferred to the investor’s demat account. In this structure, the securities were temporarily held by the brokers, which carried a slight risk of misuse. However, all registered brokers are regulated by SEBI and cannot easily misuse the securities owned by the clients. Ultimately, removing the role of brokers as intermediaries for holding stocks and securities will add to the efficiency of the Indian stock market.
In cases of rejected payouts or inactive accounts, brokers may still temporarily receive securities, but these cases will be minimal.
The new direct payout rule will be implemented in two phases. The first phase was already rolled out on the 14th of January 2024, which only covers the equity cash segment and physical settlements.
By January 2025, the second phase will expand these changes to cover all types of transactions, including securities lending and borrowing (SLB) and offer for sale (OFS). Mutual fund transactions will not be affected at all by this change in the direct payout rule. Brokers will no longer be involved in handling pledges for margin trading; instead, the CC will manage these processes directly.
What Will be the Consequences?
For Investors:
The new SEBI direct payout rule will bring a more secure and transparent settlement process for investors. Since the Clearing Corporation (CC) will directly credit the securities into the investor’s demat account, the chances of any mishandling by the brokers during the settlement process are completely removed. Investors and traders will experience no change at all in their day-to-day activities.
This shift ensures that your investments are safer than ever before. For retail investors, the process will mostly be behind-the-scenes, so they won’t have to take any additional steps. The primary benefit will be a faster and more secure transaction process.
Additionally, this rule will reduce delays in crediting stocks to your demat account, enhancing your overall trading experience. Since the broker no longer holds any control over your stocks after purchase, the risk of misuse during the settlement process is eliminated.
For Brokers:
The new regulations will reduce the responsibilities of brokers, particularly when it comes to holding and managing clients’ securities. Brokers will now focus more on executing trades and facilitating financial services rather than acting as intermediaries in the settlement process. This could also shift the operational framework for brokers, pushing them toward better client-facing services and technology-driven trading platforms.
In the long term, brokers may experience reduced operational costs because they no longer need to manage large volumes of securities through their pool accounts. However, it may also lead to a slight shift in their traditional revenue models.
Will It Reduce the Fees?
One may think that if the brokers are removed from the settlement process, this will also remove the fees that the investors have to pay to the brokers. However, nothing like that is going to happen. This can only happen if your broker decides to reduce brokerage.
The new direct payout rule isn’t designed specifically to reduce fees, but it could potentially influence brokerage charges in the future. By reducing the role of brokers in the settlement process, some operational costs for brokers might decrease. If brokerage firms choose to pass these cost savings to investors, there could be a reduction in transaction fees. However, this is not guaranteed and will vary based on the business models of individual brokers.
What will likely remain unchanged are the regulatory fees, such as Securities Transaction Tax (STT) and other government-imposed charges. So, while investors might experience safer transactions, any reductions in fees would depend on the brokerage’s pricing policies.
Conclusion
SEBI’s direct payout rule marks a significant shift in the Indian stock market, furthering the regulator’s commitment to ensuring transparency and safety for investors. By eliminating the broker’s role in holding securities, SEBI has added an extra layer of protection to investor assets. For brokers, this means fewer back-office responsibilities and a greater focus on trade execution. While fees might not immediately decrease, the changes certainly make the market more secure, setting the stage for long-term improvements in transaction processes.
With these rules taking effect, investors can enjoy a more streamlined experience, with their securities arriving faster and safer in their demat accounts. It’s a significant step forward for India’s stock market infrastructure and demonstrates SEBI’s proactive approach to improving investor protection.
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