I. SECURITIES MARKET - SEBI / Exchange Framework

Legal Requirement

Under SEBI Circular No. MIRSD/SE/Cir-19/2009 dated Dec 3, 2009, para 18 and subsequent circulars:

• Running account of client funds and securities must be settled quarterly/monthly at client preference
• For inactive clients, settlement must be done quarterly
• After settlement, the broker must ensure actual payout - retaining excess client funds is prohibited
• Under SEBI Circular on Handling of Client Securities (2019-2020), all demat accounts tagged as 'Client Margin/Collateral' and 'Client Margin Trading Securities' had to be closed by Aug 31, 2020. Failure = Rs 50,000 per account where members unable to provide reasonable explanation
• Exchange penalty structure: Non-closure of existing client beneficiary account is penalized

NSE's common violations circular (NSE/INSP/77149, 2026) specifically lists "Client funds not settled, payouts above the client's credit balance" as a recurring inspection finding

Locking means: Once settled, the client code must be flagged so no further unauthorized transactions happen, and collateral accounts must be disabled.

Why Locking is Required

• Prevents misuse of idle client securities - core issue in Karvy, IIFL cases
• Prevents creation of artificial credit balance
• Ensures compliance with enhanced supervision and prevention of third-party fund transfer

Case Laws / Enforcement

1. SEBI vs Anugrah Stock & Broking Pvt Ltd (Adjudication Order, March 2019)
SEBI inspection April 11-13, 2017 for period 2014-2015 to Sept 2016 found failure to settle accounts of clients quarterly/monthly.
SEBI imposed Rs 5 lakh fine under SEBI Act for non-settlement. The order specifically noted violation of settlement obligation - funds lying with broker without settlement and without locking constitutes misuse.

2. Angel Broking Pvt Ltd - SEBI Settlement Order No. EAD-2/SS/VS/2019-20/3690
In this case, "The applicant was not settling running accounts of the inactive clients periodically" in violation of para 18 of Annexure of SEBI Circular No. MIRSD/SE/Cir-19/2009 dated December 03, 2009 which required broker to frame policy and settle inactive accounts quarter-wise. Angel filed settlement application and paid settlement charges.

3. Karvy Stock Broking Ltd - SEBI Ex-parte Order WTM/GM/SEBI/2020
Classic failure to lock. Karvy did not settle client securities - it transferred client securities from client collateral accounts to its own demat (Client Margin/Collateral) and pledged them for its own loans. SEBI found Rs 2,300 cr of client securities misused because accounts were not closed/locked after settlement date. SEBI banned Karvy, NSE declared defaulter. This led to the 2020 circular requiring closure of all such accounts.

4. Rohitkumar Premkumar Gupta vs SEBI - SAT Order Aug 2, 2021
SAT observed that "trading has gone on without settlement of accounts i.e. without any payment" should raise serious doubt as to whether trades are genuine. Broker's failure to alert and lock such accounts indicates collusion in illiquid scrip manipulation.

5. NSE/ BSE Penalty Structure for Bank Accounts
NSE circular: "Penalty structure for Non closure of bank account named as Stock Broker - Client Account in excess of 30" - Rs 20,000 per excess account. Intent is to force consolidation and locking of client monies in designated, audited accounts only.

II. BANKING - RBI Framework for NPA Settlement

Legal Requirement

Under RBI (Commercial Banks, Resolution of Stressed Assets) Directions, 2025 and RBI Framework dated June 8, 2023 on compromise settlements:

• After successful OTS payment, bank is obliged to issue No Dues Certificate (NDC) and report account as "Settled" to credit bureaus
• Only after successful execution will account be finally closed
• RBI mandates 12-month cooling period: "lender can't give you a fresh loan for at least 12 months after settling"
• Bombay High Court interpretation: Once NPA account is settled through compromise, penal restrictions cannot continue indefinitely, but account must remain locked for fresh exposure.

Failure to lock post-settlement results in:

• Evergreening - showing settled account as still standard and giving further loan
• Double recovery attempts
• Credit bureau misreporting

Case Laws

6. Bombay High Court - [Wilful Defaulter Framework - Clause 2.5(a) of 2015 Circular] 2024-25 Judgments
HC ruled: "Once a borrower settles a non-performing account through a compromise with the lending bank, penal restrictions under RBI framework cannot continue for five years as a matter of course". Court held 5-year embargo on institutional finance for new ventures cannot apply after settlement and payment. Bank must remove wilful defaulter tag and lock old account as closed, not keep penal status alive. This was reaffirmed in LiveLaw report: "five-year embargo...cannot continue once an NPA account is settled and the dues are fully paid".

7. RBI Circular on Upgradation of NPAs
RBI observed "some banks do not comply... and consider reclassification only after one year of satisfactory performance". RBI clarified NPA can be upgraded to standard only when entire arrears are paid. If settled via compromise at lower amount, account cannot be upgraded - it must be closed/locked as settled, not evergreened as standard.

8. Consumer Forum Cases - Failure to issue NDC after settlement
NCDRC in multiple cases (e.g., ICICI Bank vs Rajesh Kumar, SBI vs Prakash Chandra) held that after settlement and receipt of settlement amount, failure to lock account, issue NDC, and update CIBIL as "Settled/Closed" amounts to deficiency of service and unfair trade practice. Banks ordered to pay compensation + correct CIBIL + close account.

III. Common Liability Pattern

For both regulators, failure to lock attracts:

• SEBI: Fine under Sec 15HB, suspension of registration, deactivation in all exchanges
• Exchanges: Rs 50,000 per unclosed collateral account + disabling
• RBI: Monetary penalty on bank, credit bureau correction orders, and in extreme - classification as fraud if account kept open to evergreen