In a groundbreaking move to safeguard investors’ funds and protect against potential misuse and defaults by stock brokers, the Securities and Exchange Board of India (Sebi) has introduced a supplementary process for trading in the secondary market. The new mechanism, set to go live on January 1, 2024, offers enhanced investor protection by allowing funds to remain in the client’s bank account while being blocked in favor of the Clearing Corporation (CC). This innovative approach eliminates the need for upfront transfers to trading members, thus minimizing the risk to investors’ capital.

Similar to the Application Supported by Blocked Amount (ASBA) facility already available for the primary market, this new process ensures that funds are only moved when an allotment takes place. With the implementation of the new framework, settlement for funds and securities will be handled directly by the CC, eliminating the requirement for trading members to manage client funds and securities. This measure provides an additional layer of security against potential misuse and default by brokers, ultimately protecting clients’ assets.

Key Features and Benefits:

1. Enhanced Investor Protection: The new framework mitigates the risk of investors’ funds being misused or defaulted upon by stockbrokers, ensuring the safety of their capital.
2. Collateral and Settlement Simplification: The Unified Payments Interface (UPI) block facility, integrated with the secondary market trading and settlement process, offers a streamlined and secure approach to collateral and settlement management.
3. Lower Working Capital Requirements: The implementation of this mechanism reduces the working capital requirements for stockbrokers, enabling more efficient utilization of resources.
4. Client Collateral Custody: The framework eliminates the custody risk associated with client collateral, as it is no longer retained by individual members but rather transferred directly to the clearing corporation.
5. Unaffected Client Pay-Outs: Even in the event of a member or fellow client default, the new mechanism ensures that client pay-outs remain unaffected.

Additionally, the new framework provides investors and stockbrokers with the flexibility to opt for the UPI block facility or choose non-UPI based trading, depending on their preferences and requirements. This adaptability allows investors with multiple trading accounts to tailor their trading experience according to their needs.

To ensure smooth implementation, the Reserve Bank of India (RBI)-approved Unified Payments Interface (UPI) mandate service of single-block-and-multiple-debits will be integrated into the secondary market trading and settlement process. Initially, the facility will be made available in the equity cash segment, with the potential for extension to other segments in the future.

Sebi’s approval of this proposal follows an extensive consultation process and demonstrates the regulator’s commitment to enhancing investor protection and market integrity. Detailed operational guidelines, including the mode of brokerage collection, will be issued by Clearing Corporations (CCs) in collaboration with relevant stakeholders, such as stock exchanges and depositories.

With the introduction of this innovative framework, Sebi not only strengthens investor confidence but also reinforces India’s position as a leader in embracing technological advancements to create a safer and more efficient investment ecosystem.