SEBI plans to implement a new payment mechanism for stock market transactions


Regulator of Capital Markets and Stock Exchanges in India, Securities and Exchange Board of India (SEBI) plans to make some changes to the mechanism in which payment is executed for a stock transaction.

If implemented, the new payment system will strengthen the protection of investors’ money and reduce the risk of irregularities.

According to a report by the Economic Times, SEBI is currently in discussion and deliberation with various capital market participants, including intermediaries, regarding a change in the payment system for trade. The new change would ensure that money tied to a stock trade would only leave the investor’s bank account after the trade is complete.

How does the payment mechanism for commerce currently work?

Currently, if an investor buys shares on the market, the money is sent from the investor’s bank account to the stockbroker (middleman). Since settlement companies take more than a day to settle the trade purchase, the money sent by investors is held by stockbrokers. After the stock market settlement is successfully completed, the stockbroker transfers the respective amount to the clearing companies.

Exposing investors’ money to scams and siphoning

Over the past three years, there have been various cases in the stock market where stockbrokers who were supposed to keep the money safe with them ended up siphoning off the money that was supposed to be transferred to the company from clearing after settlement. In some cases, even securities presented as collateral have been misappropriated.

In 2019, SEBI and National Stock Exchange engaged Karvy Stock Broking Limited for alleged misuse of their clients’ (investor) securities by transferring them to another business entity.

This incident set off alarm bells in the market and regulators began looking for ways to avoid such occurrences in the future.

Application supported by blocked amount

A similar payment system, currently discussed by SEBI, is already used in the case of transactions and investments related to IPOs.

It is a fund blocking application named “Application Supported by Blocked Amount” which ensures that payment for the investment is actually made only after the shares are allocated from the IPO.

In the mechanism, investors ask their banks to block a certain amount of money needed for the investment. The amount is debited according to the respective number of shares allocated to the investor.

With the introduction of the ASBA system in the secondary market, this would severely restrict the role of stockbrokers as an intermediary for stock market settlements. It would also limit their abilities to analyze and research the movement of money in the market.

SEBI has already entered into talks with NPCI and similar intermediaries linked to the basic infrastructure of secondary capital markets in India.

Some stockbrokers are also expected to oppose the new ruling, as it would minimize their role and restrict their activities as intermediaries.

SEBI has so far issued no official statement or comment regarding the news.


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