Capital markets regulator Sebi on Tuesday proposed to discontinue the current practice of an advance transfer of funds to stockbrokers before secondary market trades are executed. This move is aimed at safeguarding investors’ money from misuse and default by stock brokers. In its consultation paper, Sebi stated that the proposed introduction of a blocking of funds facility for trading in secondary markets will prevent misuse of client funds, brokers’ defaults and the consequent risk to investors’ capital. This would provide client-level settlement visibility (both pay-in and pay-out) to clearing corporations (CC) by direct settlement of funds and securities between client or investor and CC. Under the existing framework, clients’ assets pass through stock broker and clearing member before reaching CC. Similarly, the pay-out released by CC follows a similar cycle of passing through clearing members and stock brokers before reaching the client.
The Securities and Exchange Board of India’s (SEBI) move follows one by the Reserve Bank of India to allow a one-time blocking of funds in bank accounts and multiple debits through the unified payments interface (UPI) real-time payments system. Sebi did not spell out whether the blocking of funds would be voluntary or compulsory for retail investors. The regulator has sought comments from market participants until 16 February on any operational challenges on the proposed concept, associated processes, transaction flow and risk management.
