ASBA facility for stock trades: A double-edged sword

While ASBA (Application Supported by Blocked Amount) is primarily known for its benefits in the primary market, the Securities & Exchange Board of India (SEBI) has recently approved a framework to extend its benefits to the secondary market as well.

What is ASBA

ASBA is a facility provided by banks to investors who wish to apply for an initial public offering (IPO) of a company. The ASBA facility enables investors to apply for shares without the need to pay the entire amount upfront. Instead, the investor's bank account is only blocked for the amount of the shares applied for, and the actual amount is debited only when the shares are allotted to the investor.

ASBA for stock trades

Currently, when an investor wants to buy stocks, they transfer funds to their stockbroker, which are held in a shared pool of client accounts. When the investor places a purchase order, the broker then transfers the required amount from the client's account to the Clearing Corporation (CC).

SEBI’s new framework aims to establish a direct settlement with the CC through an ASBA facility based on the blocking funds through UPI (unified payments interface). With the proposed framework, investors will be able to create a lien directly in favour of the CC using ASBA, bypassing the need to route the funds through the stockbroker.

Boon for Investors

  • Greater control: The new framework will allow retail investors to have access to their own funds at any time thereby eliminating chances of fraud or misuse of funds by brokers or sub-brokers.
  • No interest loss: The investor continues to earn interest on his blocked funds in his savings account till the time amount is debited, ensuring no loss of interest income.
  • No need to arrange for margins: This facility will enhance efficiency by enabling the same blocked amount to be used for margin and settlement obligations, ultimately reducing working capital requirements for members.
  • Transparency: Direct settlement with Clearing Corporation (CC) will eliminate the need for passing through pool accounts of the intermediaries. This would effectively mitigate the risk of co-mingling clients' funds and securities.

Bane for brokers?

The new framework could affect brokers as it would reduce the float money or the client’s money in the pool account, which bears income for the broker. The impact is expected to be more significant for discount brokers as float income constitutes a significant portion of their overall income compared to full-service brokers who have a variety of revenue streams. To make up for this loss, it is possible that the industry may increase transaction fees for UPI block routes, or alternatively, discount brokers may consider increasing their flat brokerage fees.

However, the proposed facility is optional for investors and stock brokers for now and its full impact on the broking industry can be ascertained only when SEBI releases a final circular.

The stock market is a constantly evolving landscape and new features are introduced regularly to make investing more efficient, transparent and secure. Keeping abreast of new developments in the stock market is crucial to ensuring that investors and traders are equipped with the tools and knowledge they need to succeed in the dynamic world of investing.

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