Sebi moves to safeguard demat accounts through block mechanism

Market regulator, Securities and Exchange Board of India (Sebi), has announced fresh steps to safeguard investors’ demat accounts. The regulator has said that the so-called block mechanism will become mandatory for all early pay-in transactions with effect from November 14. The early pay of securities is used by traders to reduce their margin obligations.

Presently, the block mechanism facility is optional. So shares sold by an investor are either transferred to brokers’ pool and then sent to the clearing corporation or remain blocked in an investor’s demat account and get delivered to the clearing corporation directly. Going ahead, the former option will cease to exist.

Sebi, in a circular on Friday, said that the decision was taken “considering the benefits of block mechanism”. The regulator added that it had extensive consultations with depositories, clearing corporations and stock exchanges on the block mechanism framework and that certain brokers were opposed to the move.

Following the Karvy scandal in 2019, Sebi had announced a slew of measures to prevent misuse of client securities by brokers. These included doing away with the concept of power of attorney and introducing a new pledge and re-pledge mechanism.