SEBI asks brokers to refund customers unused funds every quarter

Sahad P V   /   October 12, 2022

In a move that is seen as a big win for investors, the Securities and Exchange Board of India (SEBI), to ensure that investors’ money is not lying idle with brokerages, directed a mandatory rule. Under the new directive, if any money remains unutilized in a client’s account for more than 45 days, it will have to be transferred to the investor’s bank account within five working days from the first Friday of that quarter. This will help reduce the risk of misappropriation of funds by brokerages and also ensure that investors’ money is not lying idle.

This decision was taken at a meeting of SEBI’s board last week and aimed at protecting investors’ interests.

When did it start? 

It is important to note that this is not a new rule and was first introduced way back in 2012. However, it was not being followed by brokerages strictly, and hence SEBI has now decided to implement it strictly. Starting from the first Friday of this month, i.e. 7th October, all unused funds in trading accounts would be automatically transferred back to the investor’s bank account on a quarterly basis. The move aims to simplify the process for investors and reduce the risk of fraud.

“This will help investors as they would not need to worry about transferring funds to their trading account before making a transaction. This will also bring down the risk of fraudulent activities as brokers would not be able to use clients’ funds for other purposes,” said a senior SEBI official.

How does it work?

The regulator said that the move would help ensure that investors’ money is not lying idle with brokerages and will also help them earn some interest on their money.

This is a welcome development move by SEBI and will go a long way in protecting investors’ interests as it ensures that brokerages do not unnecessarily hold their money. It also aligns with SEBI’s efforts to protect investor interests and promote best practices in the securities market.

The move comes after SEBI received complaints from investors about brokerages holding on to their money without any reason. Under the new rule, if an investor does not have any outstanding positions or pending orders at the end of the day on the first Thursday of a quarter, the brokerage must transfer the unused funds back to the client’s bank account by the close of business on the following Friday.

What does this mean for investors? 

For investors, this move by SEBI is a big win. It will help them earn interest on their funds or use it as they see fit and make it easier for them to keep track of their money.

What are the benefits of this move?

Some of the benefits of this move include:

  1. 1. Improved transparency– By returning unused funds to investors’ bank accounts, brokerages will have to be more transparent about how they use client money. This will help to build trust between investors and brokerages.
  2. Greater fairness– Some brokerages may use client money for their own purposes without the client’s knowledge or consent. This practice will no longer be possible under SEBI’s new directive, ensuring that all investors are treated fairly.
  3. Less operational risk– When clients are allowed to withdraw their money if a brokerage fails, the latter will be encouraged to keep more funds in safe investments. This will reduce some of the risks associated with investing in stocks.

In conclusion, SEBI’s new rule requiring brokerages to transfer unused funds back to clients’ bank accounts on the first Friday of every quarter is a positive step for investors. This will help ensure that investors’ funds are not being used unnecessarily by brokerages and will give them more control over their own finances.

Consequences of disobeying the SEBI rules 

First of all, the brokerage will be fined. The amount of the fine will depend on the severity of the infraction. If it is a minor infraction, it may only be fined a few thousand rupees. However, if it is a major infraction, you could be fined up to Rs 1 crore. In addition to being fined, they may also have their license revoked. This means that the firm would no longer be able to operate as a brokerage firm in India.

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