'A broker will never be able to...': Zerodha's Nithin Kamath explains SEBI’s new direct payout rule

From October 14, shares bought by investors will be directly credited to their Demat accounts through a net settlement process, Zerodha founder Nithin Kamath wrote in a post on X. This change, driven by new SEBI guidelines, will streamline the current system of share transfers, eliminating much of the broker's involvement in the process.

Currently, when investors purchase shares, they are first credited to the broker’s pool account before being transferred to the client’s Demat account. 

This process involves brokers managing the distribution of shares and controlling them until the final transfer is complete. Kamath noted that this can pose risks, as brokers temporarily handle client securities. 

"A broker from now on will never be able to touch client securities," Kamath said, emphasizing the increased safety of the new system.

SEBI’s updated rules will directly credit securities to investors’ accounts, simplifying the process. "This significantly simplifies our DP process," Kamath explained, referring to the current method of gross settlement, where brokers must manually allocate shares to clients. The new system, however, will bypass this step.

The new process will be implemented in two phases. From October 14, 2024, to January 13, 2025, the clearing corporations will directly transfer shares to investors’ Demat accounts for equity cash segments and physical settlements. However, if the payout cannot be completed—due to inactive Demat accounts, rejected payouts, or excess pay-in from a clearing member—the securities will still be temporarily credited to the broker’s pool account.

Starting January 14, 2025, this direct payout system will extend to all security transactions, including Securities Lending and Borrowing (SLB) and Offer for Sale (OFS). At this stage, the system will be fully automated, further minimizing the broker’s role in the settlement process. In cases of short delivery, the clearing corporation will handle auction settlements directly, removing the burden from brokers to source missing shares from the market.

For unpaid or margin-funded securities, the new guidelines will change how pledges are managed. Currently, brokers create pledges for unpaid securities, marking them as “pledged” in the client’s Demat account until the full payment is made. With SEBI’s changes, brokers will no longer handle this directly. Instead, they will request the clearing corporation to mark the pledge in the client’s Demat account.

As a client, these changes will happen behind the scenes and aim to improve the security and efficiency of the entire system. Kamath assured that the transition will not affect investors' experience directly, but will make the overall process smoother and more reliable.