I found a circular issued by SEBI related to this -
4.7 With effect from September 01, 2019, clients’ securities lying with the TM/CM in “client collateral account” , “Client Margin Trading Securities account” and “client unpaid securities account” cannot be pledged to the Banks/NBFCs for raising funds, even with authorization by client as the same would amount to fund based activity by TM/CM which is in contravention of Rule 8(1)(f) & 8(3)(f) of Securities Contracts (Regulation) Rules, 1957.
4.8 Further, the client’s securities already pledged in terms of clause 2.5 of SEBI Circular SEBI/HO/MIRSD/MIRSD2/CIR/P/2016/95 dated September 26, 2016 and clause 2 (c)
of SEBI circular CIR/HO/MIRSD/MIRSD2/CIR/P/2017/64 dated June 22, 2017 shall, by August 31, 2019, either be unpledged and returned to the clients upon fulfilment of pay-in obligation or disposed off after giving notice of 5 days to the client.
A news article also talks about this -
However, some cases of misuse also surfaced wherein certain brokers had used client’s securities for fulfilling securities shortages of other clients / proprietary trades or for raising funds for meeting debit requirements of other clients or for own account. This posed a risk to investors whose shares were being pledged, since, in case of a default by the broker in meeting his obligation towards the lender / clearing member, the pledge on the securities could get invoked and the securities could be liquidated without the client being at fault and without the client’s knowledge.
To overcome this issue, Sebi issued guidelines in June 2019 stating that client’s securities lying with the broker as collateral for availing of margin trading facility or as unpaid securities cannot be pledged to Banks/NBFCs for raising funds and that client’s securities already pledged should either be unpledged and returned to the clients upon fulfillment of pay-in obligation or disposed of after giving notice of five days to the client.
Further, no RAA is permitted for holding client securities and as per regulatory requirements, securities received in pay-out against which payment has been made by clients should be transferred to the demat account of the respective clients within one working day of the pay-out by the exchange. These measures will restrict usage of client securities for raising funds by the broker and accordingly avoid unpleasant surprises to clients arising out of sale of such securities because of a default by the broker or some other client.
For Investor Assistance, you can email - [email protected] (Found it mentioned on https://investor.sebi.gov.in/)