The trading mechanism will undergo further changes for investors in secondary stock market transactions too, if SEBI chairperson Madhabi Puri Buch’s proposals come into reality. Last week, in a seminar, she said that Securities and Exchange Board of India is considering development of new payment infrastructure for the secondary stock market on the lines of the infrastructure for application in an initial public offering (IPO).

“We are now actively engaged in looking at an ASBA-like system for the secondary market. If you are buying shares, the money should never leave the account until the settlement is done,” she had said without divulging much about the mechanism.

How ASBA worked

Application Supported by Blocked Amount, widely known as ASBA, was first introduced by SEBI in 2008 for IPO, when corruption was prevalent at that time when a few entities garnered IPO shares in the guise of retail investors to make a killing in listing gains.

To check misuse and make IPO process more transparent, SEBI had introduced ASBA, under which the bank is given the authorisation to block the amount used for IPO application without debiting the sum. The process also ensured the identity of investors.

Safeguarding investors

The amount is debited from the investor’s bank account only when their IPO application has been accepted. In case of non-allotment or partial allotment, the banks would unblock the amount.

Besides, under ASBA, funds blocked in the account, will continue to earn interest during the application processing period, if held in an interest-bearing account.

The move could be a progressive and welcome step as it would help avoid trader’s money lying in the pool account of a broker unnecessarily. As Vijay Chandok, MD and CEO, ICICI Securities, said the move will give investors full control of their money, end-to-end.

Secondary market issues

However, there would be several operational challenges while implementing it for secondary market. First, IPO is a static market and hence it was easy to implement, as the shares issuing/allotting company (through registrar) is one entity. So, all the applications come at one place, get processed and after a few days’ shares are allotted (or unallotted).

But the secondary market is dynamic where there could numerous anonymous sellers and buyers. While the money can be blocked at bank level, there is no similar mechanism now for shares to be blocked at client level, as sellers can also demand releasing of shares only after receiving amount.

Advantage to bank-owned brokerages

Besides, the framework will give advantage to bank-owned brokerages such as HDFC Securities, ICICI Securities, SBI Securities and Kotak Securities. The standalone and discount brokerages will be at a disadvantage and may have to spend on their infrastructure that could result in cost of trading going up for traders. 

Before implementation, the SEBI may consider major overhauling of the current mechanism. The new framework should integrate demat and banking accounts either through a blockchain mechanism or account aggregator system for seamless trading.

It is better SEBI implement the new system in a phased manner, as ASBA was implemented with select banks initially.