Sebi launches ASBA-like facility for secondary market to secure investor

This is similar to Application Supported by Blocked Amount like facility already available for the primary market which ensures that money from an investor gets moved only when an allotment happens

With an aim to safeguard investors' money from misuse and default by stock brokers, Sebi on Monday introduced a supplementary process for trading in the secondary market based on blocked funds in an investor's bank account, instead of transferring them upfront to the trading member.

This is similar to Application Supported by Blocked Amount (ASBA)-like facility already available for the primary market which ensures that money from an investor gets moved only when an allotment happens.

The new facility will become live by January 1, 2024, the Securities and Exchange Board of India (Sebi) said in a circular.

Under the framework, funds will remain in the account of client but will be blocked in favour of the Clearing Corporation (CC) till the expiry date of the block mandate or till block is released by the CC, or debit of the block towards obligations arising out of the trading activity of the client, whichever is earlier.

Further, settlement for funds and securities will be done by the CC without the need for handling of client funds and securities by the member.

The process safeguards clients' assets from misuse, brokers' default and consequent risk to their capital.

While a UPI block upon creation would be considered towards 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 available balance, for settlement obligations across days.

The facility will be provided by integrating Reserve Bank of India (RBI)-approved Unified Payments Interface (UPI) mandate service of single-block-and-multiple-debits with the secondary market trading and settlement process called 'UPI block facility'.

To begin with, the facility will be made available in the equity cash segment. The CCs may extend the facility to additional segments subsequently.

Explaining the features of the new framework, Sebi said that the facility would be optional for investors as well as stock brokers. Since an investor is allowed to have trading accounts across multiple stock brokers, an investor can choose to avail UPI block facility under some broker and non-UPI based trading under others.

This would result in lower working capital requirements for the members.

The new framework would eliminate the custody risk of client collateral, which is presently retained by the members and not transferred to the clearing corporation.

Moreover, there would not be any adverse impact on client pay-out even in case of member or fellow client default.

Further, detailed operational guidelines, including mode of brokerage collection, would be issued by CCs in consultation with relevant stakeholders such as stock exchanges and depositories, among others.

This comes after the board of Sebi approved a proposal in this regard in March this year. Before that, the regulator had issued a consultation paper on the subject.