The Secondary market has been grappling with the issue of misusing investors’ money. This problem can occur due to various reasons such as the absence of regulatory oversight, unethical patterns, financial mismanagement, poor governance etc. Recognising the magnitude of this issue, SEBI has come up with a new measure to address this problem.
Secondary market trading is all set to witness a transformative change in the coming days. The Securities and Exchange Board of India (SEBI) is planning to introduce an Application Supported by Blocked Amount (ASBA)-like facility for the secondary market. This facility is already available for the primary market. This move aims to protect investor funds and streamline secondary market trading. Let’s delve a bit deeper into the significance of this move. Subsequently, you will get to know its influence on investors. It is easy to begin with ASBA
ASBA stands for Application Supported by Blocked Amount. It is an initiative of SEBI.SEBI integrated it into the IPO earlier. In this method, the application contains an authorization to reserve application funds in a bank account. Thus, it prevents the utilisation of cash for other purposes. Nevertheless, the blocked amount continues to accrue interest during the blocking period. Hence, this facility ensures that the investor’s fund moves only after the completion of the allotment. It was a game changer as it effectively prevented the misuse of investors’ hard-earned money in the market. Now SEBI plans to extend this facility to the secondary market as well.
By extending ASBA to the secondary market, SEBI ensures the protection of investors' assets in the secondary market. This move safeguards the misuse of investors’ money at the hands of brokerage firms. Thus, it averts the subsequent risk to the capital. As it prevents the misuse of investors’ money, the trading environment becomes more transparent too.
In the existing framework, the investor’s or client’s money goes through the hands of the stockbroker and clearing member before reaching the clearing corporation (CC). Similarly, the pay-out of CC proceeds through clearing members and brokers before it reaches the client. Similarly, the CC's pay-out proceeds through a similar cycle, traveling through clearing members and stockbrokers before reaching the client.
Under the proposed model, money will stay in the investor’s account. However, it will be blocked in favour of the clearing corporation. This block exists until one of the three scenarios: the expiration of the block mandate, the release of the block by CC, or when the system debits to meet the client's trading obligations, whichever happens first.
Further, this facility enables visibility of client or investor-level settlement activities to the clearing corporations. The direct settlement of securities and funds between the investor and the CC makes this visibility possible.
Additionally, the facility is optional. It is the prerogative of the stock brokers and investors whether or not to opt for it. The investor has the leeway to choose trading accounts across different stock brokers. As a result, an investor can choose a UPI block facility under the existing brokers while doing non-UPI-based trading under others.
This transformative move of SEBI is the need of the hour as it safeguards investors’ money. This pivotal shift allows money to remain in the investor’s account while being blocked for trading activities. As a result, it significantly reduces the chances of misuse of the investors’ money. Moreover, it makes the settlement activities more visible and transparent. Eventually, the secondary market trading environment becomes more secure for investors.