The Securities and Exchange Board of India (SEBI), the country’s primary regulator for the securities markets, has long been committed to empowering investors. Since its inception in 1992, SEBI has introduced various regulatory measures to protect the interests of investors and promote fair practices in the Indian securities market. One such initiative that has attracted considerable attention after SEBI’s latest board meeting is the Enabled Blocked Amount (ASBA) facility for secondary market trading, which promises to be a game-changer for Indian investors. This facility is based on blocking of funds for trading in the secondary market through UPI.
As of now, ASBA is used to subscribe to Initial Public Offerings (IPOs). It is a payment mechanism that allows investors to block their funds in their bank account instead of transferring money to a broker’s account during the IPO subscription process. It ensures the safety of investor funds and streamlines the entire process of applying for shares in an IPO. Applying for IPO through ASBA has reduced the turnaround time for refunds, thereby providing more liquidity to investors. They also have the option to withdraw their application at any time during the bidding process.
The current settlement process in Indian secondary market trading takes T+1 days, where T denotes the day of the transaction. This means that the funds are blocked in the investor’s account for a day before the shares are credited to the demat account. With the implementation of ASBA-like facility in secondary market trading, investors will be able to block their funds in a bank account while placing orders. Once the order is executed, the funds will remain blocked till the shares are credited to the demat account. We can say that it will result in real-time settlement.
The application of this facility can provide several benefits to Indian investors. Firstly, investors can enjoy greater authority and transparency over their funds by blocking their money in a savings account. This approach ensures that their money does not get mixed with the money of other investors in the stockbroker’s deposit account. Moreover, investors can earn interest on their blocked funds till the time of actual debit, thereby increasing the overall profit. Secondly, it will reduce the risk of fraud and misuse of funds, as the funds are blocked in the investor’s account.
However, for a facility like the ASBA to be successful, significant changes to the existing infrastructure for secondary market trading would be required. The existing system of brokers and depositories will need to be upgraded to support real time settlement. Furthermore, the employment of a facility such as the ASBA would require significant investment in technology and training. Changes will also be required in the existing regulations and legal framework to support the new system. Also, it is likely to have an impact on brokers, as it may result in reduction of client funds held in float money or pooled accounts. This pool of money generates income for the broker – called float income – that can be affected by decisions. This could result in brokers charging higher transaction costs to compensate for the loss in float earnings.
There is no doubt that this facility will help align Indian secondary market trading with global best practices, thereby enhancing the credibility of the Indian market. Making this a reality will require a collaborative effort from all stakeholders. Overall, the ASBA can help deepen and widen the investor base in India’s stock market, which in itself would be a significant achievement.
Note that the ASBA-like facility for secondary market transactions will be optional for investors as well as stock brokers. SEBI has approved a comprehensive framework for providing ASBA-like facility to investors for secondary market trading, which is expected to reduce working capital requirements for members.
Arun Poddar is the Chief Executive Officer of Choice International Limited.
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