This change aims to enhance investor protection and improve fund management.
What is the UPI block mechanism?
The UPI block mechanism allows investors to block funds in their bank accounts for trading purposes, rather than transferring the funds to their stock brokers upfront.
This system, which was initially introduced for Initial Public Offerings (IPOs) in January 2019, is designed to safeguard investor funds and provide enhanced protection against broker defaults.
Current status
As of January 2024, this facility is optional for both investors and brokers in the secondary market.
SEBI’s new proposal seeks to make it mandatory for QSBs, who are brokers with larger client bases and significant market influence.
This move follows a successful beta launch of the UPI block mechanism in the secondary market at the beginning of 2024.
Benefits to investors
Enhanced protection: Investors will benefit from greater security as their funds will remain in their bank accounts, reducing the risk of misuse or default by brokers.
Interest earnings: Funds blocked in the investor’s bank account can earn interest, providing an additional financial benefit.
Improved transparency: The system ensures direct settlement of funds between clients and clearing corporations, reducing reliance on broker reporting and minimising risks associated with collateral management.
Impact on brokers
For QSBs, the mandate to offer the UPI block mechanism will require adjustments in their operations.
However, this change is expected to bring several benefits:
Reduced risk: Brokers will face lower risks related to client fund management and default scenarios.
Competitive edge: By adopting advanced technological solutions like UPI, QSBs can enhance their service offerings and potentially attract more clients.
Consultation and feedback
SEBI has invited public comments on this proposal until September 12, 2024.
Stakeholders are encouraged to provide feedback on whether the UPI block mechanism should be mandatory or if a “3-in-1” trading account facility could be an alternative.
