SEBI Proposes Mechanism To Block Funds For Trading In Secondary Market

SEBI is requesting comments and inputs from stakeholders and members of the public on the consultation paper till February 16

The proposed mechanism is similar to the Application Supported by Blocked Amount (ASBA) facility currently available for the primary market.

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Markets regulator the Securities and Exchange Board of India (SEBI) has tabled a proposal to introduce a blocking of funds facility for trading in secondary markets through a consultation paper released on Tuesday. The move is aimed at safeguarding investors' money from misuse and default by stockbrokers. SEBI is requesting comments and inputs from stakeholders and members of the public on the consultation paper till February 16.  

The proposed mechanism is similar to the Application Supported by Blocked Amount (ASBA) facility currently available for the primary market. ASBA ensures that money from an investor gets moved only when an allotment happens.

SEBI said the proposed introduction of a blocking of funds facility for trading in secondary markets would allow investors to trade in secondary markets based on blocked funds in one’s bank account, thereby eliminating the need to transfer funds to the stockbroker.

"This will provide client level settlement visibility (both pay-in and pay-out) to clearing corporation (CC) by Stock direct settlement of funds and securities between client and CC, thereby implementing a process, which, by design safeguards clients’ assets from misuse/brokers’ default and consequent risk to their capital," SEBI said.

As of now, assets belonging to clients first go through the stockbroker and clearing member before arriving at CC. Similar to this, the dividend made available by CC also passes via clearing members and stockbrokers before being sent to the client. While CCs provide final settlement instructions to their members each day, it is the stockbroker who settles obligations with clients.

Under the proposed model, funds would remain in the account of the client but will be blocked in favor of the CC till the expiry date of the block mandate or till the block is released by the CC, whichever is earlier. CC can debit funds from the client account, limited to the amount specified in the block.

While a UPI block upon creation would be considered collateral, the same would also be available for settlement purposes. For the clients who prefer to block lump sum amounts, their block can be debited multiple times, subject to the available balance, for settlement obligations across days.

"This comes with a dual advantage, whereby firstly it eliminates the need to transfer funds to the brokers and secondly, the funds blocked from savings accounts earn interest for the investor," SEBI said.

The proposed framework, according to Sebi, endeavors to streamline the processes in the secondary market in order to achieve the following objectives:

a)Independent and reliable identification of ownership of cash collateral available to CCs without the need to rely on reporting/ allocation by members, thereby eliminating risk of fraudulent reporting by intermediaries.

b) Elimination of custody risk of client collateral, which is retained by the members and not transferred to CC.

c) Direct settlement with CC, without passing through pool accounts of the intermediaries’ thereby providing client level settlement visibility to CC and thus the risk of co-mingling of client funds and securities does not arise.

d) Hassle-free and immediate return of client’s funds and/ or securities in case of member default.

e) No impact on client pay-out even in case of member/ fellow client default.

f) In case of member default, ease of porting of non-defaulting client to another member (as there will be no need for transfer of collateral from defaulting member to another member).

Effectively, the amount which earlier used to get transferred to the stockbroker for trading in the secondary market will remain in investors’ bank accounts and can now earn interest for the investor, it added.

With regard to the handling of the collection of brokerage from clients opting for the UPI block facility, it has been suggested that the brokerage should be kept outside the proposed UPI framework and carried out bilaterally between the client and the stockbroker.

Alternatively, CCs should deduct the standard rate of brokerage from the UPI block for all clients of a stockbroker along with settlement dues, and pass it to the stockbroker. Such a rate of brokerage can be decided by the stockbroker but should be fixed at least for a quarter, SEBI said. 

This consultation paper follows a series of discussions held with multiple stakeholders, including clearing corporations, the National Payments Corporation of India NPCI), stockbrokers, and banks.