How ASBA-like facility for secondary market trading benefits customers

Context: The capital markets regulator, Securities and Exchange Board of India (SEBI), last week approved a framework for Application Supported by Blocked Amount (ASBA)-like facility for trading in the secondary market.

The facility will be optional for investors and stock brokers. To facilitate smooth transition in the market, the framework will be implemented in a phased manner.

About Application Supported by Blocked Amount

  • ASBA, which was first introduced by SEBI in 2008, is an application by an investor that contains an authorisation to a Self-Certified Syndicate Bank (SCSB) to block in the bank account the application money for subscribing to an issue.
  • Simply put, ASBA provides an alternative mode of payment in issues whereby the application money remains in the investor’s account till finalization of basis of allotment in the issue (shares).
  • An SCSB is a recognised bank (e.g. HDFC or ICICI) capable of providing ASBA services to its customers.
  • The application money of an investor applying through ASBA shall be debited from the bank account only if her application is selected for allotment after the basis of allotment has been finalised. In public issues and rights issues, all investors have to mandatorily apply through ASBA.
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What SEBI has done?

  • It gave its nod for an ASBA-like facility for secondary market trading. The facility is based on the blocking of funds for trading in the secondary market through UPI (Unified Payments Interface).
  • At present, ASBA is available for the primary market, wherein the initial public offering (IPO) funds only are blocked on application, and are debited only on allotment.
  • Extension of ASBA to secondary markets means brokers will no longer collect margins from clients; only a block will be placed on the bank account.

How will the ASBA facility benefit retail investors in the secondary market?

  • ASBA in secondary market trading will ensure that clients will continue to earn interest on the blocked funds in their savings account till the debit takes place.
  • There will be direct settlement with Clearing Corporation (CC), without passing through the pool accounts of the intermediaries. Hence, it will provide client-level settlement visibility to CC, and help avoid the risk of co-mingling of clients’ funds and securities.
  • It will eliminate the custody risk of client collateral, which is currently retained by the members, and is not transferred to the CC. There will be hassle-free and immediate unblocking of client’s funds and/ or return of securities in case of member default.
  • The markets regulator said the facility will bring efficiency in the secondary market ecosystem by allowing usage of the same blocked amount towards margin and settlement obligations. It will result in lower working capital requirements for members.
  • Under the proposed framework, stock brokers will be allowed to either directly settle the brokerage with the UPI clients or opt for CC’s facility to deduct standard rate of brokerage from the UPI block of the clients.

Will this impact the markets?

  • Market participants feel that the ASBA-like system for the secondary market would impact volumes. While client volumes may not be impacted, the proprietary volumes can be negatively impacted.
  • Much of these funds are client funds and that could take a hit. This is also likely to reduce the leverage provided by brokers to the clients.
  • So, there will certainly be a short-term volume impact, although it is expected to be value accretive in the long run.

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