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Business News/ Money / Personal Finance/  ASBA: A Game-Changer for Indian Investors
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ASBA: A Game-Changer for Indian Investors

ASBA for secondary market is based on blocking of funds through UPI

Photo: MintPremium
Photo: Mint

The Securities and Exchange Board of India (Sebi), the country’s primary regulator for securities markets, has long been committed to empowering investors. Since its inception in 1992, Sebi has introduced various regulatory measures to protect the interests of investors and promote fair practices in the Indian securities market. One such initiative that has garnered considerable attention post-Sebi’s latest board meeting is the Application Supported by Blocked Amount (ASBA) facility for secondary market trading, which promises to be a game-changer for Indian investors. The facility is based on the blocking of funds for trading in the secondary market through UPI.

As of now, ASBA is used for subscribing to initial public offering (IPO). It is a payment mechanism that allows investors to block their funds in their bank account instead of transferring the money to the broker’s account during the IPO subscription process. It ensures the safety of investor funds and streamlines the entire process of applying for shares in an IPO. By applying for an IPO through ASBA, there has been a reduction in the time taken for refunds, thereby providing greater liquidity to investors. They also have the option to withdraw their application at any time during the bidding process.

The current settlement process in the Indian secondary market trading takes T+1 days, where T denotes the day of the transaction. It means that the funds are blocked in the investor’s account for one day before the shares are credited to the demat account. The implementation of ASBA-like facility in secondary market trading would enable investors to block their funds in the bank account while placing the order. Once the order is executed, the funds will remain blocked until the shares are credited to the demat account. We could say that this would result in a real-time settlement.

The application of this facility can have several benefits for Indian investors. Firstly, Investors can enjoy enhanced authority and transparency over their funds by blocking their money in a savings account. This approach ensures that their money is not mixed with other investors‘ funds in the stockbroker’s pooled account. Furthermore, investors can earn interest on their blocked funds until the time of actual debit, adding to the overall benefit. Secondly, it would reduce the risk of fraud and misappropriation of funds, as the funds are blocked in the investor’s account.

However, in order for ASBA-like facility to be successful, the secondary market trading would require significant changes in the existing infrastructure. The existing system of brokers and depositories would need to be upgraded to support real-time settlement. Moreover, the employment of ASBA-like facility would require significant investment in technology and training. It would also require changes in the existing regulations and legal framework to support the new system. Also, it is likely to have an impact on brokers, as it could lead to a reduction in the float money or the client’s funds held in the pooled account. This pool of funds generates income for the broker—called float income—which may be affected by the decision. This could result in brokers charging higher transaction costs to compensate for the loss in float income.

There is no doubt that this facility would help align the Indian secondary market trading with the global best practices, which would enhance the credibility of the Indian market. It would require a collaborative effort from all stakeholders to make it a reality. Overall, ASBA could help to deepen and widen the investor base in India’s stock market, which would be a significant achievement in itself.

Note that the ASBA-like facility for secondary-market transactions shall be optional for investors as well as stock brokers. Sebi has approved the broad framework for ASBA-like facility being made available to investors for secondary market trading, which is expected to lower working capital requirements for the members.

Arun Poddar is the chief executive, Choice International Ltd.

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Published: 19 Apr 2023, 11:26 PM IST
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