SEBI’s Draft CUSPA Reform: Clearer Timelines and Processes for Handling Unpaid Securities

The Securities and Exchange Board of India has released a draft circular proposing a comprehensive reshaping of the framework for managing clients’ unpaid securities through the “Client Unpaid Securities Pledgee Account” (CUSPA). The intent is twofold:

  • simplify operational processes for Trading Members (TMs) and Clearing Members (CMs), and
  • continue to safeguard investors’ interests by ensuring proper segregation and protection of client securities.

The existing rules, subsumed in paragraph 46 of the SEBI Master Circular for Stock Brokers dated June 17, 2025, required use of a dedicated CUSPA demat account for pledging unpaid securities. Following inputs from the Brokers’ Industry Standards Forum (ISF), as well as subsequent regulatory changes such as mandatory pay-out of securities directly to clients’ demat accounts, SEBI has now put forward a revised CUSPA framework for public consultation.

This article explains the key proposals in the draft circular, their practical implications for intermediaries, and how they aim to ease both business operations and investment experience while retaining strong investor protection.

Background of the CUSPA Framework

Original Objective of Unpaid Securities Handling

Earlier SEBI circulars, namely CIR/HO/MIRSD/DOP/CIR/P/2019/75 dated June 20, 2019 and SEBI/HO/MIRSD/MIRSD-PoD-1/P/CIR/2022/153 dated November 11, 2022, laid down norms for handling securities that had been purchased but not fully paid for by clients. These provisions were later consolidated into paragraph 46 of the Master Circular for Stock Brokers dated June 17, 2025.

Under this framework:

  • For securities that remained unpaid by a client, the TM/CM had to ensure these were held separately and pledged to a dedicated demat account titled “Client Unpaid Securities Pledgee Account (CUSPA)”.
  • The aim was to ensure:
    • clear segregation between securities that are fully paid and those not yet paid;
    • that client assets are not misused for funding obligations of the intermediary; and
    • that there is transparent tracking of unpaid securities and any pledge or invocation.

New Market Developments and Industry Feedback

Two major developments prompted a review of the framework:

  1. Regulatory Change

    • Introduction of mandatory pay-out of securities directly into clients’ own demat accounts, even for unpaid securities.
    • This changed the earlier mechanics where intermediaries could receive pay-outs into their own pool accounts and then manage unpaid securities.

  2. Industry Representations

    • The Brokers’ ISF and Market Infrastructure Institutions (MIIs) raised concerns about:
      • misconceptions among clients regarding a “mandatory” five trading day funding window;
      • absence of clear timelines for release of pledge once payment is made;
      • inability to effect partial release of pledges where partial payments are received or value of pledged securities fluctuates;
      • unclear processes when TM and CM are different entities; and
      • lack of any provision for exceptional market conditions where liquidation of unpaid securities is practically impossible.

In response, SEBI has released a draft circular proposing a complete substitution of paragraph 46 of the Master Circular, with a refined and more operationally aligned CUSPA mechanism.

Key Policy Changes Proposed in the Draft Circular

1. Clarifying the Maximum Funding Window

Issue Identified:
Many clients have presumed that they are automatically entitled to a fixed five trading day period from the pay-out date to clear their funding obligations for unpaid securities. Industry bodies highlighted this as a misinterpretation of the framework, leading to disputes and delayed settlements.

Proposed Clarification:

  • The revised paragraph explicitly states that:
    • A TM may allow up to five trading days from the pay-out date for payment in respect of securities purchased by clients who do not avail Margin Trading Facility (MTF).
    • However, the TM has full discretion to stipulate a shorter period than five trading days, based on its internal policy.
    • The TM’s policy must clearly define the maximum funding period (not exceeding five trading days) and must be communicated to all clients in advance.

Note: The five trading days from pay-out are a regulatory ceiling, not an automatic entitlement. Each TM’s documented policy will govern the actual period available to its clients.

2. Pledging Structure and Communication Requirements

Direct Pay-out and Pledge Mechanism

Under the revised framework: