Capital markets regulator SEBI has proposed to mandate Qualified Stock Brokers (QSBs) to provide facilities to their customers to trade in the secondary market using UPI-based block mechanism, similar to the ASBA facility.
In the UPI blocking mechanism, instead of transferring funds to a trading member in advance, customers can transact in the secondary market based on the blocked funds in their bank account.
This facility is currently optional for investors and is not required to be provided by Trading Members (TMs) to serve their clients.
A facility similar to ASBA (Application Supported by Blocked Amount) is already available in the primary market, which ensures that investors’ funds are moved only when allocations are made.
SEBI, in a consultation paper released on Wednesday, suggested that QSBs should provide facilities for customers, individuals and HUFs to transact using UPI block mechanism in the cash segment and should provide appropriate paths for implementation.
It has also been suggested that QSB could offer a “3-in-1 trading account facility” instead of mandating a facility similar to ASBA.
For a 3-in-1 trading account, clients deposit funds into their bank account and earn interest on their cash balance.
SEBI also clarified that while the 3-in-1 facility is available in the cash and derivatives segments and has no size limit, the current trading facility using UPI block mechanism is available only in the cash segment and there are some restrictions on the number of blocks allowed per day.
“However, compared to the UPI facility, the 3-in-1 transaction account facility provides adequate protection to the customers, considering that deposits and withdrawals of funds are made through TM, but the level of protection is lower,” he added.
The Securities and Exchange Board of India (SEBI) has invited public comments on the proposal until September 12.
TM is classified as QSB based on factors such as the size and scale of its operations, including the number of active clients, total assets held through TM, intraday margin of all clients, and trading volume of TM.
Being designated as a QSB carries with it increased responsibilities and obligations. QSBs are also subject to enhanced monitoring by market infrastructure agencies.
The regulator introduced the use of RBI-approved Unified Payment Interface (UPI) with funds blocking facility as a payment mechanism for retail investor applications submitted through intermediaries for public equity issues such as IPOs from January 2019.
The beta version of transactions via the blockchain mechanism for the secondary market was launched on January 1, 2024 for individuals and HUFs and was applicable only to the cash segment.
Currently, this facility is optional for investors and not mandatory for trading members. It is provided as a service to our clients.
SEBI anticipates that if TM is willing to adopt this system, this mechanism could become a popular way for retail investors such as individuals and HUFs to trade in the securities market.
“Customers who choose to use UPI blocking mechanism for secondary market transactions primarily benefit through interest on the balances they maintain in their bank accounts. This is because with UPI blocking mechanism, these funds remain in their accounts rather than being transferred to TM,” SEBI said.