Protecting investors

Sebi's decisions will improve transparency

In its board meeting on Wednesday, the Securities and Exchange Board of India (Sebi) decided to launch a facility like “Applications Supported by Blocked Amount” (ASBA) for secondary-market transactions, along with instructions for upstreaming client funds directly to clearing corporations by stockbrokers. The regulator has also amended the Sebi (Alternative Investment Funds) Regulations, 2012, in order to set up a Rs 33,000-crore Corporate Debt Market Development Fund as an alternative investment fund. This will act as a backstop. It could buy investment-grade corporate-debt securities during times of stress to help stabilise the bond market and enhance secondary-market liquidity. The backstop will increase confidence in the market. Sebi will also establish a regulatory framework for environmental, social, and governance (ESG) rating providers, along with guidelines for ratings and disclosures. Besides, it has decided to strengthen the mechanism for investor-grievance redress. The ASBA mechanism and direct remittances to clearing corporations will reduce the possibility of brokers misusing investor funds. By setting up a framework for ESG, Sebi can improve transparency in ESG investing. The secondary-market ASBA may, however, impact the financial margins of standalone brokerages.

ASBA is a boon to primary-market investors. Investors may subscribe to an initial public offering and the funds required are blocked and held in escrow in their bank accounts and continue to earn interest. A primary-market ASBA is also not hard to manage, since only one security and one service provider — the entity managing the allotment — is involved. An analogous ASBA in the secondary market will be more complex. A trader may be investing in a wide range of instruments for different timeframes, including day-trading on margin. An order may also be placed in multiple ways, at market price, or priced with a limit, or across two exchanges to get the optimum price, using smart order routing. Any of multiple service providers may be counterparties.

As things stand, if an order is placed through the securities trading subsidiary of a bank, the money stays in the bank account until it is required, which is similar to ASBA. But if a trade is placed through a standalone brokerage, the trader must deposit funds (or shares) with the broker to cover the transaction. That deposit may be misused — there have been many such cases. Sebi is proposing that secondary-market transactions be done via the Unified Payments Interface mechanism with the money directly remitted to the clearing corporations, which will then settle accounts with the brokers concerned. This would reduce the risk of misuse and minimise pain in the case of a broker default. The trader would also continue to earn interest until an order is filled.

However, standalone brokers do earn significant sums in the form of interest accruing from the client funds they hold. This float can amount to over Rs 20,000 crore a day. Given that the margins for brokerages are very low, the loss of that interest income may lead to financial stress and trigger consolidation because smaller brokerages may not be able to sustain operations. In terms of ESG, Sebi is proposing that ratings be done along the entire value chain of any listed entities. A core business responsibility and sustainability report is to be introduced with key performance indicators. This will lead to more transparency in this area.