The Securities and Exchange Board of India (Sebi) on Tuesday released a consultation paper to discuss whether to allow trading in secondary markets using blocked funds in a savings bank account instead of transferring them to trading accounts. In a notification, Sebi sought inputs from various stakeholders, including the public, to introduce a facility enabling such a transaction.
Sebi said it “provides client-level settlement visibility (both pay-in and pay-out) to clearing corporation (CC) by a direct settlement of funds and securities between client and CC, thereby implementing a process, which safeguards clients’ assets from misuse, brokers’ default, and risk to their capital.”
The consultation paper follows a series of discussions with stakeholders, including clearing corporations, the National Payments Corporation of India (NPCI ), stockbrokers, and banks.
The planned facility is similar to the application supported by the blocked amount (ASBA) procedure used in initial public offers (IPO) and other primary market issues. Under ASBA, the fund, though blocked, remains in your account with interest benefits.
What is Application Supported by Blocked Amount (ASBA)?
ASBA provides authorisation to block the money in a bank account to subscribe to an issue. But the money would be debited only if the application is selected for allotment after the process is finalised.
In a circular in May last year, Sebi prescribed ASBA in public issues for all categories of investors, notifying that applications would be accepted only if it was backed with the required money in the bidder’s bank account. Sebi had asked the exchanges to ensure the money is blocked before processing the application, stating that "stock exchanges shall accept the ASBA applications in their electronic book building platform only with a mandatory confirmation on the application monies blocked.”
Meanwhile, in the latest paper, Sebi, notes that since the Indian securities market has seen tremendous growth both in terms of volumes and in the number of participants in the last couple of years, it has “also put greater onus on Sebi to make markets safer” for participants, especially retail participants.
It further highlighted that as per the existing framework, investors post collateral with their stock brokers before executing trades and carrying out the settlement of funds and securities.
While stock brokers, for their proprietary trades and for trades of investors, in turn, “post collateral with their Clearing Member (CM) and carry out the settlement of funds, securities through their CM,” the paper states.
Additionally, the existing framework allows retention of a certain portion of collateral at every level, “for e.g., when a client/investor posts collateral, part of it can be retained by a stockbroker, part by CM before passing on the remaining to CC. Hence, investors’ assets pass through the stockbroker and clearing member before reaching CC, and similarly, the pay-out released by CC follows a similar cycle of passing through the clearing member and stockbroker before reaching the client. While CCs provide
final settlement instructions to their members each day, it is the stock broker who settles obligations with clients”, it said.