SEBI proposes mandatory UPI block mechanism facility for secondary market trading

Capital markets regulator SEBI has proposed mandating Qualified Stock Brokers (QSBs) to offer the facility of trading in the secondary market using the UPI-based block mechanism to their clients, similar to the ASBA facility.

In the UPI block mechanism, clients can trade in the secondary market based on blocked funds in their bank accounts, instead of transferring the funds upfront to the trading member.

The facility is currently optional for investors, and not mandatory for Trading Members (TMs) to offer as a service to clients.

Application Supported by Blocked Amount (ASBA)-like facility is already available for the primary market, which ensures that money from an investor gets moved only when an allotment happens.

In its consultation paper on Wednesday, SEBI suggested that QSBs must provide the facility of trading using the UPI block mechanism in the cash segment for their clients, individuals and HUFs, with an appropriate glide path for implementation.

Also, it has been suggested that QSBs can offer a "3-in-1 trading account facility" as an alternative to making the ASBA-like facility mandatory.

In the case of 3-in-1 trading accounts, the clients would have their funds in their bank account, earning interest on the cash balances.

In addition, the 3-in-1 facility would be available for the cash and derivatives segment, without any amount restrictions, while the facility of trading using the UPI block mechanism at present shall be available only for the cash segment, with some restrictions on the number of blocks allowed daily, SEBI said.

"However, compared to UPI facility, the facility of 3-in-1 trading accounts provide adequate, albeit lower protection to the clients, considering that the pay-in and pay-out of funds are routed through the TMs," it added.

The Securities and Exchange Board of India (SEBI) sought public comments till September 12 on the proposals.

TMs are classified as QSBs based on factors such as the size and scale of their operations, including the number of active clients, the total assets held by clients with the TM, the end-of-day margin of all clients, and the trading volume of the TM.

Being designated as a QSB brings with it enhanced responsibilities and obligations. Further, QSBs are also subjected to enhanced monitoring by Market Infrastructure Institutions.

The regulator had introduced the use of RBI-approved Unified Payments Interface (UPI) with the facility of blocking of funds, as a payment mechanism for retail investor applications submitted through intermediaries for public issues such as IPO from January 2019.

The Beta version of trading through block mechanism for secondary markets was launched on January 1, 2024, for individuals and HUFs, and was made applicable only to the cash segment.

At present, the facility is optional for investors, and not mandatory for trading members to provide as a service to clients.

SEBI anticipates that this mechanism may eventually become a popular method for retail investors, such as individuals and HUFs, to trade in the securities markets, provided that TMs are willing to adopt the system.

"Clients who choose to use the UPI block mechanism for their secondary market trades will primarily benefit from the interest earned on the balances they maintain in their bank accounts. This is because, with the UPI block mechanism, these funds remain in their account rather than being transferred to the TM," SEBI said.