SEBI Proposes Mandatory ASBA-Like Trading Facility For Qualified Stock Brokers Leveraging UPI Block Mechanism In Secondary Markets

This facility would leverage the Unified Payments Interface (UPI) block mechanism which has been in use for retail investor applications in public issues since January 2019. The proposal is outlined in a consultation paper where SEBI also seeks feedback on whether QSBs could alternatively offer a "3-in-1 trading account facility" instead of making the ASBA-like facility compulsory.

The ASBA facility in the primary market allows investors to trade without transferring funds upfront instead blocking amounts in their bank accounts until allotment is completed. This system enhances the protection of client funds and securities by ensuring that money moves only after the necessary conditions are met. In the secondary market, the proposed ASBA-like facility would provide similar protections. Under this system, investors could block funds in their bank accounts for trading, eliminating the need to transfer funds to the trading member (TM) in advance.

QSBs, or Qualified Stock Brokers, are designated based on the size and scale of their operations, including factors like the number of active clients, total assets held, end-of-day margins, and trading volume. Being classified as a QSB comes with enhanced responsibilities and obligations and SEBI believes that these brokers are well-positioned to lead the implementation of new technological advancements like the UPI block mechanism in the secondary market.

SEBI's proposal is built on the foundation of the UPI mandate service, which allows for a single block and multiple debits from a client's account. This service, introduced for secondary market trading in January 2024, provides a supplementary mechanism that offers several benefits to investors. For instance, it enhances the safety of client assets by ensuring that funds and securities move out of the client's account only on the clearing corporation's instructions and to the extent of the settlement obligation.

SEBI's consultation paper highlights the progress made in discussions with various stakeholders, including Clearing Corporations, the National Payments Corporation of India (NPCI), and banks to address the challenges in operationalizing this facility.

One of the key points under deliberation is the commercial arrangement between NPCI, sponsor banks, and customer banks. Unlike in the primary market, where issuers compensate banks for providing the ASBA facility, the secondary market's beneficiaries are the investors themselves. These investors would benefit from earning interest on their blocked funds which remain in their bank accounts rather than being transferred to the broker.

SEBI's data analysis shows that the implementation of the UPI block mechanism would not overburden NPCI's existing UPI transaction processing capacity.

In addition to the UPI block mechanism, SEBI is also considering the 3-in-1 trading account facility as an alternative. This facility, already offered by some trading members, allows clients to keep their funds in their bank accounts. However, while the 3-in-1 facility is more readily implementable and available for both cash and derivatives segments, it provides a slightly lower level of protection compared to the UPI block mechanism.

Click Here To Read/Download The Consultation Paper