Under the proposed system, investors would be able to trade in the secondary market based on blocked funds in one’s bank account thereby eliminating the need to transfer funds to the stockbroker. This mechanism is similar to the Application Supported by Blocked Amount (ASBA) facility in the initial public offering (IPO) market that ensures that money will move from investors’ bank accounts only after the allotment happens in the IPO.
Currently, brokers coordinate the payments between the clearing corporation and investors in the stock market settlement process. An investor must send the funds for purchasing shares to the broker, who then transfers it to the clearing corporation through a clearing member. Once the proposed system is implemented, the investors will do direct settlements with stock exchanges’ clearing corporations.
“…there is a possibility that a client’s collateral retained with a stockbroker or clearing member can be misused. Similarly, the pay-out due to the client can also be at risk in case the stockbroker and/or fellow client(s) defaults,” Sebi said in a discussion paper on Tuesday, seeking public comments by February 16.
While clearing corporations provide final settlement instructions to their members each day, it is the stockbroker who settles obligations with clients.
The capital markets regulator proposed that the Unified Payments Interface (UPI) mandate service of a single block and multiple debits can be integrated with the secondary markets to enable clients to block funds in their bank account for trading in the secondary market, instead of transferring it upfront to the trading account maintained with the broker.
Under the proposed model, funds would remain in the account of a client but will be blocked in favour of the clearing corporation till the expiry date of the block mandate or till the block is released by the clearing corporation, whichever is earlier. Clearing corporations can deduct funds from clients’ bank accounts, limited to the amount specified in the block, said Sebi.Further, while a UPI block would be considered collateral, it would also be available for settlement purposes, said Sebi.
For clients who prefer to block lump sum amounts, the funds can be debited multiple times for settlement obligations across days, said the discussion paper. This comes with a dual advantage, whereby it eliminates the need to transfer funds to brokers.
Effectively, the amount which earlier used to get transferred to the stockbroker for trading in the secondary market will remain in the investors’ bank account and can now earn interest for the investor, the regulator said. Sebi also said brokerage should be kept outside the proposed UPI framework and carried out bilaterally between the client and the stockbroker.
