If implemented, the new payment system would increase protection of money of investors and ensure there is a lesser chance for irregularities.
According to a report by the Economic Times, SEBI is currently in discussions and deliberations with various stakeholders in the capital market, including intermediaries, regarding a change in the payment system for trade. The new change would ensure that money related to a stock trade would only leave the bank account of the investor once the trade is completed.
How is the payment mechanism for trade working now?
Currently, if an investor purchases stock from the market, the money is sent from the bank account of the investor to the stock broker (intermediary). Since the settlement corporations take more than one day to settle the trade purchase, the money sent by investors is kept by stock brokers. Once the stock market settlement is complete successfully, the stock broker transfers the respective amount to the clearing corporations.
Exposure of money of investors to scam and siphoning
In the last three years, there have been various instances in the stock market world where stock brokers who were supposed to keep the money safely with them ended up siphoning off the money which was supposed to be transferred to the clearing corporation after settlement. In some instances, even securities which were presented as collateral were siphoned off.
In 2019, SEBI and National Stock Exchange booked Karvy Stock Broking Limited for alleged misuse of securities of their clients (investors) by transferring them to another business entity.
This incident caused alarm bells in the market and regulators started to look for ways in which such events can be avoided in the future.
Application Supported by Blocked Amount
A similar payment system which is now being discussed by SEBI is already under use in the case of transactions and investments related to Initial Public Offerings.
It is a fund blocking application named ‘Application Supported by Blocked Amount’ which ensures that the payment for investment is actually completed only once the shares are allotted from the IPO.
In the mechanism, investors request their banks to block a certain amount of money needed for the investment. The amount is debited according to the respective number of shares allotted to the investor.
With the introduction of the ASBA system to the secondary market, it would heavily restrict the role of stock brokers as an intermediary to the stock market settlements. It would also limit their abilities to analyse and research the movement of money in the market.
SEBI has already begun talks with NPCI and similar intermediaries related to the core infrastructure of secondary capital markets in India.
It is also expected that some stock brokers would be against the new move as it would minimise their role and restrict their activities as intermediaries.
SEBI has so far not released any official statements or comments regarding the news.