On Tuesday, 17^th January 2023, the Securities and Exchange Board of India recommended a system to prevent money from being used for stock market trading. The action will aid in preventing stockbrokers from misusing investors’ money. In the event of a Primary Market Initial Public Offer (IPO), this capability is already available. In this, funds are only taken out of the investor’s account when he receives the notification of the IPO’s share allotment. In the consultation document, SEBI stated that the ability to ban money or funds for stock market trade is available. Investors will be able to conduct business using the funds in the bank account. Investors won’t have to transfer money to the stock broker anymore. Additionally, thanks to the Fund Block facility, the Clearing Corporation will be able to offer client-level services for both pay-out and inflow.

It is a new system of payment of deals that SEBI proposed for payment and sale in the secondary market, due to which the Broker will be able to withdraw only a fixed amount from the customer’s account.

The specifics of the proposed arrangement for the adoption of the new payment system for the secondary market aim to discourage brokers from potential financial abuse of investors. Industry insiders predicted that the Indian stock market would surpass other global markets in efficiency and sophistication after implementing the new technology and reducing the T+1 settlement cycle. The market regulator hopes to benefit from the additional debit facilities that the Reserve Bank of India (RBI) has granted for the Unified Payments Interface (UPI) through this.

The general public has been asked for their opinions on this by SEBI. According to the discussion paper, single block and multiple debits, which the RBI has allowed for UPI, might be combined with the secondary market to make it easier for clients to block money and make transactions there and the ability to prevent the selling of any money in respective bank accounts. In addition, the trading participant is not required to pay this sum upfront. The security of the client’s money will improve with the adoption of the new system. The system architecture for the secondary market is more intricate, though. Due to the fact that it covers a variety of trading activities, such as buy, sell, and intraday trading involving cash and derivatives.

Currently, clients can open a 3-in-1 account with bank-backed brokerages, and the broker receives payment equivalent to the deal value. However, SEBI acknowledges that it still has several flaws that have not been fixed. This includes non-settlement payments, incorrect customer fund withdrawals, and false information. The new system would also shield the market from the risk of broker default.

Before trading at this time, the investor must send the specified sum to the broker. The broker receives additional funds as a result, giving them the chance to earn interest on it. According to industry estimates, over ₹ 30,000 Crores of clients’ money, is held by brokers. The funds will be transmitted immediately to the clearing company while remaining secure in his own account. For the primary market, also known as ASBA (Application Supported by Blocked Amount), a similar system has been developed.

A Suggestion For A Payment System Similar To ASBA

1. SEBI’s action aims to stop brokers from misusing the clients’ money.
2. At the moment, clients must pay the broker in advance of the transaction
3. Customers will have the option under the new system to block the specified amount in their own accounts and transfer it straight to the Clearing Corporation.
4. This resource is accessible via UPI.

The market regulator stated that while there may be a variety of reasons why stockbrokers default, misappropriation of customer funds and/or securities is the main cause. In addition to costing a lot of clients’ money, such events also erode investor trust in the securities market and are very concerning.

According to SEBI, “In order to sustain the confidence of investors, it is vital that they are given enough security under the proposed system against stockbrokers’ misappropriation of money and securities of clients.” The new method, which will leverage technology, will provide a warning if brokers misuse funds or assets at the appropriate moment.