On Tuesday, the Securities and Exchange Board of India (Sebi) proposed a block mechanism enabling investors to bypass brokers when investing or trading in the secondary market.

The amount currently transferred to the stockbroker will remain in the investor’s bank account and can earn interest for the investor. The move will also reduce liquidity for brokers, which could impact revenue and require higher working capital. This is because the idle balance in the trading account earns interest income for the brokerage firm.

Regulators hope to combine the Unified Payments Interface (UPI) authorisation service for multiple debits of a single block with a secondary market, providing a block mechanism like a securities pledge mechanism, and customers will be able to freeze funds in their bank accounts. Funds are used for secondary market transactions. This will differ from the current practice of transferring funds upfront to trading members.

Currently, investors and clients post collateral with their stockbroker before executing trades and settling funds and securities through their stockbroker on the crystallisation of settlement obligations.

Under the proposed model, funds should remain in the client’s account. Still, they will be frozen by the Clearing Corporation (CC) until the freeze authorisation expires or until the CC releases the freeze, whichever is earlier. CC can deduct funds from customer accounts up to the amount specified in the block.

Additionally, while UPI blocks will be considered collateral when created, they can also be used for settlement purposes. For customers who prefer a one-time hold on an amount, their hold can be debited multiple times, depending on the available balance, for settlement obligations across days. This has a two-fold advantage: it eliminates the need to transfer funds to a broker, and second, funds frozen from a savings account can earn interest for investors.

This will help create an independent and reliable identification of CC usable cash collateral ownership without relying on broker reporting/allocation. Settling directly with CC, without going through a collection account of an intermediary, will eliminate the risk of mixed client funds.

“Stock brokers need not allocate any collateral to clients under the UPI block facility as CC will maintain/update client collateral value based on blocking information received from NPCI’s UPI railroad directly through CC’s sponsor bank. This will result in lower compliance costs for stockbrokers. Subsequent procedures such as allocation of proprietary collateral, validation of 50:50 cash collateral, and risk mitigation mode monitoring will remain unchanged,” the consultation paper said.