On Monday, SEBI (Securities and Exchange Board of India) directed all qualified stock brokers (QSBs) to offer investors enhanced trading options in the secondary market by February 1, 2025. QSBs must introduce either a UPI-based fund-blocking mechanism or a comprehensive three-in-one trading account facility. This move seeks to elevate investor protection and convenience in stock trading.
The UPI block mechanism lets investors earmark funds in their bank accounts specifically for stock trading, without the need to transfer cash upfront to a broker. This feature provides an added layer of security, ensuring that investors’ funds remain within their control until a trade is executed. Initially launched in 2019 for IPOs, this payment system expanded to secondary markets this year. Since its introduction, the mechanism has been well-received for offering safer and more controlled trading options. In the beta phase, this UPI block system has been limited to individual investors and Hindu Undivided Families (HUFs) trading in the cash segment, where it remains optional for trading members.
Alternatively, brokers can offer clients a three-in-one trading account, integrating a savings, demat, and trading account in one unified platform. This setup simplifies transactions by automating fund and securities blocking—seamlessly setting aside funds for buy orders and securing stocks in the demat account for sell orders. Not only does this streamline the process, but it also allows investors to earn interest on uninvested funds in their savings accounts.
SEBI’s updated framework aims to mitigate risks associated with defaults by trading and clearing members, enhancing safeguards for investor funds and securities. Outlined in SEBI’s October 2023 Master Circular, this initiative intends to strengthen cash collateral protection, reducing counterparty risks in secondary market trades. By retaining control over their funds, investors are less exposed to potential losses due to broker defaults.
Anirudh Garg, partner and fund manager at Invasset PMS, highlighted the directive's significance, noting that the fund-blocking mechanism offers a new level of security and flexibility for investors. “This system gives investors greater control and is a step towards preventing any loss of investments due to broker defaults,” Garg commented. He believes these features may increase market confidence, particularly among low-risk investors, and expects participation to rise as SEBI implements these investor-friendly mechanisms.
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