The Securities and Exchange Board of India (Sebi) on Tuesday proposed a block mechanism to enable investors to bypass brokers while investing or trading in secondary markets.

The amount, which at present gets transferred to the stock broker, will instead remain in the investors’ bank account and can earn interest for the investor. The move will also lower the float for brokers, which could impact revenues and necessitate a higher working capital. This is because idle balances lying in a trading account earn interest income for a brokerage firm.

At present, investors and clients post collateral with their stock broker before executing trades and carry out settlement of funds and securities through their stock broker upon crystallisation of settlement obligations.

Under the proposed model, funds shall remain in the account of the client, but will be blocked in favour of the clearing corporation (CC) till the expiry date of the block mandate or till the block is released by the CC, whichever is earlier. The CC can debit funds from client account, limited to the amount specified in the block.

Further, while a UPI block upon creation will be considered towards collateral, it will also be available for settlement purposes. For the clients who prefer to block a lumpsum amount, their block can be debited multiple times, subject to available balance, for settlement obligations across days. This comes with a dual advantage: it eliminates the need to transfer funds to the brokers and secondly, the funds blocked from savings account earn interest for the investor.

This will help create an independent and reliable identification of ownership of cash collateral available to CCs without the need to rely on reporting/ allocation by brokers. The direct settlement with CC, without passing through pool accounts of the intermediaries’, will eliminate the risk of co-mingling of client funds.

“The stock brokers will not be required to allocate any collateral for clients under the facility of UPI block since the CC will directly maintain/ update the client collateral value based on the blocking information received from the UPI railroads of NPCI through the CC’s sponsor bank. This shall result in lower compliance cost for stock brokers. The subsequent procedures such as deemed allocation of proprietary collateral, validation of 50:50 cash collateral, risk reduction mode monitoring will remain unchanged,” the consultation paper said.

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