The Securities and Exchange Board of India (“SEBI”) has issued a circular, bearing no. SEBI/HO/MIRSD/DOP/CIR/P/2019/136 and dated November 15, 2019 (“the Circular”) pertaining to mapping of Unique Client Code (“UCC”) with demat accounts of clients.
SEBI had also issued a circular on December 17, 2018, bearing no. SEBI/HO/MIRSD/DOP/CIR/P/2018/153, invoking early detection and warning mechanisms if securities are being diverted. The Circular issued by SEBI is a continuation of the circular issued on December 17, 2018 which provided certain guidelines regarding early warning mechanism of diversion of securities. The December 17 circular stated the following:
Stock exchanges would devise an early warning mechanism for diversion of payout of securities to non-client/ other client accounts. In other words, if securities are being diverted to any unauthorised accounts then stock exchanges/clearing house corporations/depositories must devise a mechanism so that such securities may be identified and be warned at the earliest stage. An unauthorised account may be the one through which funding of illegal activities is being conducted. Some brokers may also utilise their license to commit fraudulent activities.
A mechanism would also be made so as to identify if there is any mismatch between gross securities pay in and pay out files of a stock broker. The pay in date is the date on which the shares are transferred to the broker after the sale by the investor. Similarly, pay out date is the date on which the buyer receives the shares from the broker. Such securities transfer would be compared with the client’s actual depository account by the Depository and if there is any mismatch then such information may be given to the concerned stock exchange or clearing corporation.
Through the Circular, SEBI has mandated that each client’s UCC would be mapped with their demat accounts. This would facilitate in easy and more efficient reconciliation. The mechanism that SEBI will implement is as follows:
The UCC that has been provided by the trading member, who is a member of the derivatives segment of a stock exchange, to the client would be mapped with demat account of the client.
If the client is trading through multiple trading members then all such UCCs should be mapped with one or more demat accounts.
The stock exchange will share the UCC data with depositories. Such data would include PAN, segment, trading member code, and the UCC which has been allotted. This data which has been prepared would be shared with respective depositories by November 30, 2019 on a one-time basis. All new UCCs which are created and all data pertaining to such UCCs would be shared on a daily basis.
If any client wishes to add or delink their UCC, they may do so by requesting the respective depository and such an application would be processed through the depository participants.
The mapping of the UCC data with the demat account would be done on the basis of the PAN number provided in the respective UCC database.
A redressal platform would also be created to address the complaints which clients may have.
Stock exchanges will also ensure that any UCC which may have become inactive are not misused. Such inactive UCC data would be separated out while mapping client’s UCC with their demat accounts.
The UCC should be mapped by stock exchanges and depositories to clients’ demat account latest by December 31, 2019. The stock exchanges have also been directed to publish all such information which may be required pertaining to UCC in their respective websites and to furnish updates on the process of mapping of UCC in their monthly development report.
The provision of UCC digitizes the process to make it more efficient and convenient for depositories and stock exchanges. This would help in detecting any illegal diversion of securities by investors. A separate UCC would be allotted when a client places a trade through different broker hence keeping a check and balance on every trading member. This will be a time-consuming process as each and every UCC allotted would be mapped with demat accounts. Currently, many investors practice diversion of securities in an illegal manner to make fast money. The notification would curb such practices and make trading more ethical. The possibility of the misuse of UCC cannot be eliminated, hence, if this is indeed a transparent process or not, one can only comment after verifying the proposed structure in practice.
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