The Securities and Exchange Board of India (SEBI) has issued a Circular advising Stock Exchanges (SE) and Clearing Corporations (CC) to initiate suitable action for liquidating assets of defaulter members and debit balance clients. This Circular is dated 28th September 2020.
SEBI has observed in this Circular that in certain cases of default by Trading Member (TM) or Clearing Member (CM) there was a shortfall of securities/ funds with the defaulter member resulting in its inability to meet the obligation of clients/ SE/ CC.
Further, the SEBI elucidates that the bye-laws of SE/CC state the procedure for declaring its member as a defaulter if, inter alia, the member is unable to meet its obligations.
Furthermore, SEBI also points out that these bye-laws have provisions for the initiation of recovery proceedings in the above circumstances.
Through this Circular, however, SEBI categorically advises SEs and CCs to initiate suitable action for liquidating assets of the defaulter member and of the debit balance clients. This action must be initiated before the appropriate court within six months from the declaration of the member as a defaulter.
Additionally, such action extends to both movable and immovable assets of the defaulter member, which are not in possession of the SE/ CC. Moreover, the recovery of the funds of the debit balance clients will be limited only to the extent of the debit balance.
Pertinently, SEBI by an earlier Circular dated 1st July 2020 had, inter alia, stated in case debit balance clients fail to clear their balance within 5 days of receipt of notice requiring them to do so, then SEs/ CCs must initiate settlement of their accounts by selling their securities.
In the light of the present Circular, SEs and CCs are required to make necessary amendments to the bye-laws, rules and regulations so as to be in consonance with this Circular. They are also required to bring this Circular to the notice of their Members/ Participants and upload it on their website. Further, they must inform SEBI of the status of implementation of this Circular in their monthly development report.
