The Securities and Exchange Board of India (SEBI) has introduced a new facility aimed at preventing defaults by trading and clearing members. Starting from January 1, 2024, investors’ bank accounts can be blocked for secondary market trading, rather than transferring funds upfront to the trading member, according to a circular issued by SEBI.
This facility, which integrates the Unified Payments Interface (UPI) mandate service of single block and multiple debits with the secondary market trading, is similar to the Application Supported by Blocked Amount (ASBA) mechanism already available in the primary market, specifically for initial public offerings (IPOs).
By deploying UPI in the secondary market, SEBI aims to enhance the security and protect investor assets from misuse and capital risks. Additionally, this move is expected to encourage greater adoption of UPI by retail investors and offer a more convenient payment method while helping to contain broker defaults and fortify the system.
SEBI emphasized that the use of this facility will be optional for investors, and all cash collaterals will be provided exclusively through UPI block. Cash equivalent collateral, such as bank guarantees and fixed deposits, will not be permitted, while securities collateral listed in the approved clearing corporation will need to be provided through a pledge/re-pledge system. Funds pay-in settlement will be exclusively done via UPI block.
Under this initiative, SEBI has set a single block threshold limit of INR 5 Lakh, consistent with the current norm for UPI-based securities market transactions. Users will also have the ability to create multiple blocks within the overall applicable limit in UPI.
This development comes after SEBI released a consultation paper on the matter a few months ago and obtained approval from its board for the proposal back in March. The new facility is expected to enhance the efficiency and security of secondary market trading in India.
