🟢 Final Circular — Amendment to Master Circular
Issued by SEBI's Market Intermediaries Regulation and Supervision Department (MIRSD) on 3rd July, 2026. Amends Paragraph 46 of the Master Circular for Stock Brokers dated 17th June, 2025. Implementation is phased — see Effective Dates below.
Background
Paragraph 46 of the Master Circular for Stock Brokers governs how trading members (TMs) and clearing members (CMs) handle securities that clients have not fully paid for. These provisions trace back to SEBI Circular Nos. CIR/HO/MIRSD/DOP/CIR/P/2019/75 dated 20th June, 2019 and SEBI/HO/MIRSD/MIRSD-PoD-1/P/CIR/2022/153 dated 11th November, 2022. Since then, the regulatory landscape has moved — most notably with the introduction of mandatory pay-out of securities directly into clients' demat accounts — creating a mismatch between the older provisions and current market practice.
The Brokers' Industry Standards Forum (ISF) flagged operational challenges with the existing framework and sought revisions aligned to the current environment. In response, SEBI has rewritten Paragraph 46 in full, introducing a structured auto-pledge mechanism, a dedicated pledgee account, defined timelines for invocation and release, and a controlled extension process for exceptional situations — all aimed at improving ease of doing business for brokers while protecting client interests.
Creation of Pledge for Unpaid Securities
For trades outside the margin trading facility (MTF), unpaid securities must now be paid out directly to the client's demat account. Immediately after, the TM must create an auto-pledge — without needing any specific client instruction — marked with reason "unpaid," in favour of a new dedicated account.
📝 Key Term: CUSPA
"Client Unpaid Securities Pledgee Account (CUSPA)" — a separate account that each TM must open specifically to hold auto-pledged unpaid securities.
After the pledge is created, the TM must send the client an email or SMS explaining the outstanding funds obligation and clarifying that the TM has the right to sell the pledged securities if the client fails to pay.
Policy Requirements for Trading Members
Every TM must formulate and maintain a policy — either standalone or as part of its Risk Management Policy — governing how it handles unpaid securities, aligned with this circular and any exchange operational guidelines. This policy must be communicated to all clients before implementation.
⚠️ Key Deadline
The TM's policy must specify a maximum payment period — capped at 5 trading days from the pay-out date — within which the client must clear the funds obligation.
While CUSPA-pledged unpaid securities may be counted for reporting client margin collection to the Clearing Corporation, TMs are explicitly barred from allowing the client any trading exposure on the strength of those pledged securities.
Daily Release of Pledge on Excess Value
While the client's funds obligation remains outstanding, the TM must, on a daily basis, determine the maximum value of securities that may stay pledged, based on the client's ledger balance, overall margin obligations, or other factors specified by exchange operational guidelines. If pledged securities exceed this maximum value, the TM must release the pledge on the excess quantity on or before the next trading day.
Invocation of Pledge
If the client fails to meet the payment obligation within the prescribed timeline, the TM must invoke the pledge and liquidate the unpaid securities as per its policy, giving the client reasonable notice beforehand.
Auto-Release of Pledge
✅ Automatic Safeguard for Clients
If a pledge on unpaid securities is neither invoked nor released within 5 trading days after pay-out, depositories will automatically release the pledge at the end of the 6th trading day — the securities then become free, unencumbered balance in the client's account. TMs may request release any time before this auto-release occurs.
Prohibition on Further Pledging or Transferring CUSPA Securities
❌ Not Permitted
Securities pledged in favour of a TM's CUSPA cannot be further pledged or transferred to banks or NBFCs for raising funds.
Extension of Pledge in Exceptional Circumstances
If unpaid pledged securities cannot be liquidated within the standard 5-trading-day window due to specific, defined circumstances, TMs may request a limited extension.
📝 Qualifying Circumstances
- The security is in lower circuit with only sellers
- Suspension or trading halt due to surveillance or other reasons
- Any other valid reason recognised by Market Infrastructure Institutions (MIIs), including unforeseen circumstances beyond the TM's control
⚠️ Extension Process
The TM must request an extension by 6 PM on the 5th trading day after pay-out, allowing the pledge to continue for up to one additional calendar week. Further extensions of similar length may be sought if qualifying conditions persist — but once conditions cease, no further extension is permitted. Each extension requires a fresh communication to the client. Failure to request an extension within the stipulated timeframe triggers automatic system-based release of the pledged securities.
Key Changes: Earlier Framework vs New Requirement
Compliance Checklist
☑ Trading Members: Open a dedicated CUSPA account and set up auto-pledge functionality for unpaid securities pay-outs.
☑ Trading Members: Draft or update the standalone/RMP policy on unpaid securities, including invocation, release, and extension processes, and communicate it to clients before implementation.
☑ Trading Members: Set up automated client email/SMS notifications at the pledge-creation stage and for each extension.
☑ Trading Members: Build daily monitoring of maximum pledge value against ledger balance and margin obligations.
☑ Trading Members: Ensure systems track the 5-trading-day deadline and the 6 PM cut-off on day 5 for extension requests.
☑ Stock Exchanges: Issue operational guidelines in consultation with depositories within 30 days of this circular (i.e., by early August 2026).
☑ Depositories: Prepare systems for auto-release on day 6 and for verifying block details on invocation.
📌 Directions to Stock Exchanges and Depositories
The circular directs Stock Exchanges and Depositories to: (i) bring the provisions of this circular to the notice of their members/participants and disseminate them on their websites; (ii) make necessary amendments to relevant Bye-laws, Rules and Regulations to give effect to these provisions; and (iii) put in place appropriate systems and arrangements to implement them.
CorpLawUpdates Analysis
The most significant shift here is the move to a standardised, system-driven lifecycle for unpaid securities — auto-pledge on pay-out, a defined payment window, automatic release if unresolved, and a tightly bounded extension mechanism. This replaces what was previously a more discretionary, TM-specific approach with a framework that depositories can enforce mechanically, reducing scope for disputes over whether a client was properly notified or given adequate time.
The phased effective dates are worth flagging for compliance teams: Paragraphs 46.1 to 46.11 (the core auto-pledge, policy, invocation, and prohibition provisions) only kick in three months after stock exchanges issue their operational guidelines — not from the circular date itself. Paragraphs 46.12 to 46.14 (the extension provisions) follow a fixed six-month timeline from 3rd July, 2026. TMs should track exchange guideline releases closely, since that triggers the compliance clock for the bulk of the new requirements.
Operationally, the toughest lift is likely to be the daily maximum-pledge-value calculation under Paragraph 46.6-46.7, which requires TMs to continuously reconcile ledger balances and margin obligations against pledged security values — this will need close coordination with back-office and risk systems, and clear internal ownership before the compliance clock starts running.
The explicit bar on pledging CUSPA securities to banks/NBFCs closes a potential leverage loophole and signals SEBI's continued focus on ring-fencing client securities from broker-level financial stress.
Source: SEBI Circular HO/38/11/(9)2026-MIRSD-POD/I/15382/2026 dated July 03, 2026, "Handling of Client's Unpaid Securities by Trading Members," issued by Kumar Abhishek, Deputy General Manager, Market Intermediaries Regulation and Supervision Department. Available at www.sebi.gov.in under Legal → Circulars.
This article is for informational and educational purposes only and does not constitute legal or regulatory advice. Verify with primary regulatory sources before acting.
