SEBI's 'fund blocking' mechanism to empower investors

 August 9, 2022

Sebi's reported plan to alter the payment mechanism in stock market trades to check any possible misuse of investor money makes eminent sense. The plan entails extending the 'fund blocking' mechanism - where funds from an investor's bank account directly flow to settle the trade bypassing the broker - to the secondary market trade.

The Application Supported by Blocked Amount (Asba) method has worked well for initial public offerings (IPOs). Rightly, the extension will enable the investor to be in control of her funds, eliminate the brokers' handling of client money and quicken the trade settlement process.

Sebi, which wants to bring the entire market under the T+1 settlement system, can leverage the efficiency in the payments system built by RBI and make near-real-time settlements at least in retail trades. Around 250 million UPI users can be targeted to widen retail participation in secondary market trades.

Resistance from brokers cannot be ruled out, underscoring Sebi's ability to rally the change. A change in the architecture is warranted as multiple debits are involved in these trades. Giving investors the choice on whether they want to block amounts for secondary trades is a good idea.

Sebi tightened rules after instances of brokers allegedly siphoning off money and securities of clients surfaced. Brokers are barred now from using the cash of one client for another's upfront margin requirement, and from pooling client money before the funds are channelled to the fund house.

But Sebi must ensure that extending Asba does not cause disruption in the market. The T+1 settlement system, for example, poses operational challenges for foreign portfolio investors (FPIs) in different time zones. The regulator must understand such concerns.

[The Economic Times]