Sebi mulls stock payment system bypassing brokers

Mumbai: The Securities and Exchange Board of India (Sebi) is considering an ambitious plan to alter the payment mechanism in stock market trades. The markets regulator is discussing with market infrastructure intermediaries the possibility of implementing a system that will result in money effectively leaving an investor's bank account only after a trade is completed, said three people familiar with the development. This would mean funds from an investor's bank account would not go to the broker but directly flow to settle the trade.

At present, such a system exists in the 'primary' or IPO market. Sebi is exploring bringing the 'fund-blocking mechanism' to the secondary stock market. Known as ASBA or Application Supported by Blocked Amount, this method is mandatory for investing in initial public offerings (IPOs).

Bid to Minimise Risks

In this method, an investor instructs her bank to block money for an investment. Sebi's proposal to extend the ASBA process to stock market settlement is aimed at minimising brokers' handling of clients' money and quickening the trade settlement process.

The proposal, which is on the drawing board, has been discussed in meetings between Sebi, National Payments Corporation of India (NPCI) - an entity for enabling digital retail payments - and stock exchanges' clearing corporations, the people mentioned above said. The regulator is believed to have constituted a working group to iron out the hurdles in its implementation.

An email sent to Sebi went unanswered till the time of going to print.

Currently, stock brokers coordinate the payments between the clearing corporation and investors in the stock market settlement process. An investor must send the funds for purchasing a stock to the broker, who then transfers it to the clearing corporation.

"Initial talks have happened. There are multiple parties involved and architecture has to be finalised," said one of the people in the know. "The thinking is not to make it mandatory initially. To begin with, it could be left to investors whether they want to block amounts for secondary trades."

In an IPO, the ASBA system blocks the application amount in the investor's bank account. The blocked amount is debited only to the extent of the shares allotted in the IPO.

Sebi's new plan to implement ASBA in stock market settlement could effectively bypass the broker as the funds could be transferred from the investor's bank account to the clearing corporation. This will restrict the role of a broker to an executor of trades and stock research provider, triggering protests from a section of the broker community.

The regulator had begun tightening the rules after various instances of brokers, including Karvy Stock Broking, allegedly siphoning off money and securities of clients surfaced in the past three years.

The latest proposal broadening the scope of ASBA to clear secondary stock trades is in line with a slew of Sebi's recent steps to restrict brokers' use of clients' money and minimise systemic risks. Among some of the rules implemented this year, the regulator from May 1 barred brokers from using the cash of one client for another's upfront margin requirement. For investors buying mutual fund units through stock brokers on stock exchanges and other online platforms, Sebi has also halted the practice of pooling client money by brokers before it was channelled to the fund house. The new rule requires investor mandates to buy MFs through brokers on platforms to be in favour of clearing corporations.

A section of the market thinks the use of ASBA to settle secondary market trades will be challenging as it would require a new system to replace the existing one.

“It will not be easy because there is currently no payment technology solution that supports this,” said a leading broker. “If Sebi is trying to automate a crucial part of the settlement process, it should also be ready for payment failures like what has been happening in IPOs.”

Brokers said implementing ASBA for secondary market trades is way trickier than IPO applications, which are processed over a few days.

“In stock trading, a client might want to buy shares immediately and if transfer through the payment gateway does not happen immediately like it has been happening for all online purchases, there will be big opportunity losses,” said the chief executive of another large brokerage. “It's known that 10-20% of the UPI payments face glitches and if that happens in stock market transactions, it leads to settlement issues.”