SEBI wants a fund-blocking option to protect investors from stock brokers

Invetsing in a stock market can be tricky business for individual investors, which is why poeple trust stock brokers with their portfolio. But funds lying with brokers are also at times misused, and payment defaults also haunt investors. To protect people trading in secondary markets from these risks, market regulator Securities and Exchange Board of India (SEBI) has proposed an option to block funds.

Primary markets already have an Application Supported by Blocked Amount (ASBA) facility, which ensures that an investor's cash is only moved after allotment of shares. SEBI hopes to help investors trade in secondary markets with funds which are blocked in their bank accounts. Client level settlement visibility (both pay-in and pay-out) to clearing corporations (CC) will also be facilitated by the tool.

Currently assets of clients have to pass through stock brokers and clearing members before they reach CC, and the pay out also passes through the same channel of clearing members and stock brokers.

The proposal by SEBI is open for public comments till February 16, and a Unified Payments Interface (UPI) system of single block and multiple debits has been pitched to enable a block mechanism. Hence clients can block funds in bank accounts for trading in secondary market, instead of transferring them upfront to brokers.

The blocked funds will be in favour of the CC, and they can only debit funds specified by the block. Collection of brokerage will be left out of the framework and will have to be done between the client and the stock broker. As for CCs, they will deduct brokerage from the UPI block and send it to the stock broker directly.