Investors will soon have the option to block securities on their respective demat accounts for sale transactions apart from the existing early pay-in mechanism.
In a circular issued on Friday, markets regulator Sebi said the "block mechanism" in the demat accounts of clients undertaking sale transactions would be available from August 1.
Under the Early Pay-In (EPI) system, shares are transferred from a client's demat account and those are transferred back in case the sale transaction is not executed.
With the block mechanism, shares of a client intending to make a sale transaction will be blocked in the client's demat account in favour of the clearing corporation concerned.
If the sale transaction is not executed, shares will continue to remain in the client's demat account and will be unblocked at the end of the T (Trade) day. Blocking of shares will be on 'time basis'.
The proposed facility of block mechanism is on an optional basis and EPI mechanism will also continue, Sebi said.
The watchdog's latest decision comes after it received representations from clients undertaking sale transactions.
Market expert says “This is a very welcome step. Anything that enhances protection and secures the investors' securities balances against potential misuse, like it happened in a spate of recent cases, is laudable. It will also reduce the administrative burden on intermediaries”.
“This is a outstanding move by SEBI, which 1. Prevents avoidable movement of securities for unfulfilled orders 2. Solves the issue of unnecessary corporate actions accruing to brokers 3. Improves overall margin efficiency. - Uttam Bagri, Chairman, Bombay Stock Exchange Brokers Forum
In the early pay-in process, if the securities remain unsold, then, those are required to be returned back to the client's demat account, which take time and involve cost.
Depositories and clearing corporations will have to put in place an appropriate system by participants or members to make available the block mechanism for clients in the securities market, Sebi said.
With regard to process flow for block mechanism, Sebi said the securities lying in client's demat account will be blocked either by the client using depository's online system or eDIS mandate or through depository participant based on physical DIS (Delivery Instruction Slip) given by client or Power of Attorney (PoA) holder.
Depositories can block the securities in the client's demat account in respect of intra or inter depository transfer instruction till pay-in day. The blocked securities will be transferred only after checking against the client level net delivery obligation received from clearing corporations.
Further, depositories will provide the details of transfer instructions to clearing corporations for clients to avail the EPI benefit. The completion of the transaction will also be subject to whether orders match or not.
Brokers or clients will not be allowed to unblock securities if EPI benefit is provided by clearing corporations to clients for the same.
"When the client intends to block securities for a sale transaction, shares will remain blocked in favour of clearing corporation. If securities are blocked in favour of clearing corporation, then all margin would deemed to have been collected and penalty for short/ non-collection of margin including other margins shall not arise," Sebi said.(Note: Added comments from expert spoke to Moneycontrol)