SEBI moots UPI-like block mechanism for securities market

Contact Counsellor

Last Updated31/08/2024

The Securities and Exchange Board of India (SEBI) has proposed mandating Qualified Stock Brokers (QSBs) to offer the facility of trading in the secondary market using the UPI-based block mechanism to their clients.

The Securities and Exchange Board of India (SEBI) has introduced a significant proposal aimed at modernizing and streamlining the trading process for retail investors in the secondary market.
The proposal centers around mandating Qualified Stock Brokers (QSBs) to offer a UPI-based block mechanism, similar to the existing Application Supported by Blocked Amount (ASBA) facility, to their clients.
This move could potentially transform the way retail investors, particularly individuals and Hindu Undivided Families (HUFs), participate in the securities market.

Under this system, funds are blocked in the client's bank account rather than being transferred upfront to the trading member (TM).
This allows investors to retain control of their funds until the transaction is executed, akin to the ASBA facility used in the primary market.

The UPI block mechanism is optional for investors, and QSBs are not mandated to offer it as a service. This provides flexibility to both the brokers and the clients in choosing their preferred trading method.

As an alternative to making the UPI block mechanism mandatory, SEBI suggests that QSBs can offer a "3-in-1 trading account facility."
This account integrates banking, trading, and demat services, allowing clients to earn interest on their cash balances while ensuring the seamless execution of trades across cash and derivatives segments.

Currently, the UPI block mechanism is available only for the cash segment with certain restrictions on the number of blocks allowed daily. In contrast, the 3-in-1 facility covers both cash and derivatives segments, providing broader applicability.

The 3-in-1 account offers a slightly lower level of protection compared to the UPI block mechanism, as the funds in this system are routed through the TMs.
However, the interest-earning potential and broader segment coverage make it an attractive option for investors.

One of the primary benefits is the ability for investors to earn interest on their funds while they remain blocked in their bank accounts, rather than transferring them to the broker.

Investors maintain greater control over their funds until the trade is executed, enhancing transparency and trust in the trading process.

The mechanism reduces the risk of funds being misused or misallocated, as they remain in the investor's account until the point of transaction.

SEBI anticipates that this mechanism, if adopted by TMs, could become a popular method for retail investors to engage in the securities market, aligning with the broader push towards digitalization and investor protection.

Qualified Stock Brokers, classified based on the size and scale of their operations, have enhanced responsibilities and obligations under this proposal.
The adoption of the UPI block mechanism could also lead to a shift in how these brokers interact with retail clients, emphasizing the need for robust digital infrastructure and client education.
Moreover, as QSBs are subject to enhanced monitoring by Market Infrastructure Institutions, the adoption of this new mechanism would necessitate stricter compliance and operational standards to ensure the smooth functioning of the system.