The Securities and Exchange Board of India (Sebi) has proposed to introduce a new settlement mechanism for share trading from January 1. The proposed system is similar to the Application Backed by Blocked Amount (ASBA) facility available to an IPO applicant, which ensures that money will move from the applicant’s bank account only after the allocation in the IPO. The new facility will initially be available only in the share cash segment but may later be extended to other segments. Reena Zachariah explains the new system:
What is the new settlement?
Under the proposed settlement mechanism for stock trades, investors will effectively leave their bank accounts only after trades are completed. This will eliminate the need to transfer funds to the trader. Also, investors will make a direct settlement with the clearing corporation of the stock exchanges. This move aims to protect investors’ funds from abuse by stockbrokers and prevent default by brokers, thereby minimizing the subsequent risk to their assets.
How does the current process work?
Currently, brokers coordinate payments between the clearing corporation and investors in the stock market settlement process. An investor must send the funds for buying shares to the broker, who then transfers it to the clearing corporation through a clearing member. For example, in a pre-financed customer purchase, the customer transfers ₹150 to the trader. The broker can retain the client’s funds and assign collateral to the extent of 20% (₹30) margin requirements at the clearing corporation. The customer buys a share for ₹100, and the margin collection requirement is ₹20, which is blocked by the customer’s allocation. The guarantee is released after the broker completes the online settlement with the clearing corporation.How will the proposed process work?
Sebi has proposed that the Unified Payments Interface (UPI) mandate service of single block and multiple debits can be integrated with the secondary market to provide a block mechanism through which the customers will be able to block funds in their bank account for trading in the secondary market, instead of transferring them in advance to the broker. The funds will remain in the customer’s account but will be blocked in favor of the clearing corporation until the expiry date of the block mandate or until the block is released by the clearing corporation, whichever occurs earlier. Cleaning corporations can deduct funds from the client’s bank accounts, limited to the amount specified in the block. Further, while UPI block will be considered as collateral, it will also be available for settlement purposes. For customers who prefer to block lump sums, the funds can be debited multiple times for settlement obligations over days. This comes with a double benefit – while it eliminates the need to transfer funds to brokers, the funds locked in the savings account earn interest for the investor.
For example, in a pre-funded customer purchase, the customer creates a block of ₹150 in favor of the clearing corporation. The amount will be allocated as collateral. The customer buys a share worth ₹ 100. The margin requirement is ₹ 20, this will be adjusted by the block that is allocated as collateral. Securities tax and stamp duty will be 11 paise which will be added to the customer’s duty. The clearing corporation will owe ₹ 100.11 towards settlement within the stipulated time. After the customer’s debit, the customer’s receivable securities will be provided in the customer’s deposit account directly from the clearing corporation at the time of payment.
What are the main features of the framework?
Utilizing UPI block facility will be at the option of the investor. It will be introduced as an optional facility by the trader. Since an investor is allowed to have trading accounts across multiple stock brokers, the investor can choose to use UPI block facility under some brokers and non-UPI based trading under others. Edge and compromise will continue to be segment-wise. A single block limit of ₹ 5 lakh will apply, which is currently applicable for UPI-based stock market transactions. However, multiple blocks can coexist subject to the total limit applicable in UPI.