SEBI Guidelines on Direct Payout of Securities

The Securities and Exchange Board of India (SEBI) introduced the Direct Payout of Securities mechanism to simplify post-trade processes and improve transparency for retail investors. This move aims to eliminate unnecessary intermediation in the transfer of securities and ensures that investors receive their securities directly in their demat accounts after a trade is settled. In this article, we explore what the direct payout is, its impact, and key operational details under the SEBI framework.

SEBI’s Direct Payout facility is a settlement mechanism that allows securities bought on the stock exchange to be directly credited to the investor’s demat account, bypassing the broker’s pool account. Traditionally, after a trade, securities were first credited to the broker’s pool account and then transferred to the investor’s demat account, which introduced a time lag and potential risks. The direct payout system eliminates this intermediary step.

The intent behind SEBI's introduction of this framework is to strengthen investor protection and reduce operational risks. Here are the key goals of the regulation:

• Enhance transparency: Ensuring direct visibility and control for investors over their assets.
  

• Minimise misuse: Prevent possible misuse of client securities by intermediaries.
  

• Speed up settlement: Eliminate unnecessary delays between purchase and credit of securities.
  

These guidelines primarily apply to:

• Retail investors transacting on the stock exchanges
  

• Stockbrokers and clearing members
  

• Depositories and clearing corporations
  

All trading members and brokers are mandated to comply with the direct payout process for retail investors, unless the client has explicitly opted out in writing.

Understanding the step-by-step process involved in a direct payout helps clarify its operational structure:

1. Trade Execution: Investor places a buy order via the broker’s platform.
   

2. Clearing Corporation Involvement: The exchange’s clearing corporation identifies the final beneficiary (investor).
   

3. Settlement: On T+1 (or as per the applicable cycle), securities are directly credited from the clearing corporation to the investor’s demat account.
   

4. Broker Role: Brokers facilitate the order but do not handle or control the delivery of securities.

This structure ensures that securities are not routed through the broker’s demat or pool account.

In its circulars issued over time, SEBI has laid out specific instructions for market intermediaries:

• Mandatory Implementation: All brokers must ensure system-level readiness to enable direct credit.
  

• Client Opt-Out Clause: Clients who prefer the traditional route must provide a one-time written consent to opt out of direct payout.
  

• Responsibility on Clearing Corporations: These entities must map the beneficiary clearly to ensure error-free credit.

The transition to a direct payout model offers several advantages to investors:

• Improved safety: Reduces risk of misappropriation or delays caused by broker involvement.
  

• Faster settlements: Investors receive shares without intermediary routing.
  

• Transparency: Investors can verify trades directly through depository statements.
  

• Regulatory compliance: Brokers remain compliant with client asset segregation norms.

Despite the benefits, there are a few considerations for both brokers and investors:

• System dependencies: Timely credit depends on the technological infrastructure of clearing corporations and depositories.
  

• Investor education: Not all investors are aware of this option and may not understand how to monitor or confirm credit.
  

• Broker operational challenges: Brokers must maintain robust back-end systems and update client consent management practices.

The new system demands greater automation and process control from brokers. They need to:

• Implement clear segregation of client accounts
  

• Upgrade settlement systems to communicate with clearing corporations in real-time
  

• Educate clients on the mechanism and obtain explicit opt-out consent where applicable

While SEBI encourages default direct payout, it allows flexibility for investors:

• Clients may submit a physical or digital opt-out form indicating their preference to route securities through the broker.
  

• Opting out may be preferred by investors who participate in margin trading or follow specific trading strategies that require broker handling.

SEBI’s direct payout framework is a strong regulatory step towards increasing investor protection, transparency, and settlement efficiency in Indian capital markets. By allowing securities to move directly from the clearing corporation to the investor’s demat account, it removes unnecessary intermediaries and reduces associated risks. It also encourages accountability among market intermediaries and aligns with global best practices.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.