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The Securities and Exchange Board of India (Sebi) has proposed to introduce a new settlement mechanism for stock trades from January 1. The proposed system is similar to the Application Supported 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 allotment in the IPO. The new facility will initially be available only in the equity cash segment but may later be extended to other segments. Reena Zachariah explains the new system:

What is the new settlement facility?
Under the proposed settlement mechanism for stock trades, investors’ funds will effectively leave their bank accounts only after trades are completed. This will eliminate the need to transfer funds to the stockbroker. Also, investors will do direct settlement with the clearing corporation of the stock exchanges. This move is aimed at safeguarding investors’ funds from misuse by stock brokers and preventing default by brokers, thus minimising the consequent risk to their assets.

How does the current process work?
At present, brokers coordinate payments between the clearing corporation and investors in the stock market settlement process. An investor must send the funds for purchasing shares to the broker, who then transfers it to the clearing corporation through a clearing member. For instance, in a pre-funded purchase by a client, the client transfers ₹150 to the stockbroker. The broker may retain the client’s funds and allocate collateral to the extent of 20% (₹30) margin requirements at the clearing corporation. The client purchases a share for ₹100, and the margin collection requirement is ₹20, which is blocked from the client’s allocation. The collateral is released after the broker completes the net settlement with the clearing corporation.How will the proposed process work?
Sebi has proposed that the Unified Payments Interface (UPI) mandate service of a single block and multiple debits can be integrated with the secondary market to provide a blocking mechanism, whereby the clients will be able to block funds in their bank account for trading in the secondary market, instead of transferring them upfront to the broker. The funds will remain in the account of a client but will be blocked in favour of the clearing corporation till the expiry date of the block mandate or till the block is released by the clearing corporation, whichever is earlier. Clearing corporations can deduct funds from the client’s bank accounts, limited to the amount specified in the block. Further, while a UPI block will be considered collateral, it will also be available for settlement purposes.For clients who prefer to block lump sum amounts, the funds can be debited multiple times for settlement obligations across days. This comes with a dual advantage – while it eliminates the need to transfer funds to brokers, the funds blocked from the savings account earn interest for the investor.

For instance, in a pre-funded purchase by a client, the client creates a block of ₹150 in favour of the clearing corporation. The amount will get allocated as collateral. The client purchases a share worth ₹100. The margin requirement is ₹20, this will get adjusted from the block, which is allocated as collateral. Securities transaction tax and stamp duty will be 11 paise, which will be added to the client’s obligation. The clearing corporation will debit ₹100.11 towards settlement at the stipulated time. After the debit from the client, the securities receivable by the client will be provided in the client’s depository account directly by the clearing corporation at the time of settlement payout.

What are the main features of the framework?
Availing UPI block facility will be at the option of the investor. It will be introduced as a non-mandatory facility by the stockbroker. Since an investor is allowed to have trading accounts across multiple stock brokers, the investor can choose to avail UPI block facility under some brokers and non-UPI-based trading under others. Collateral and settlement will continue to be segment-wise. A single block limit of ₹5 lakh will apply, which is currently applicable for UPI-based securities market transactions. However, multiple blocks can co-exist subject to the overall limit applicable in UPI.

  • Published On Dec 25, 2023 at 04:25 PM IST

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