Implications of ASBA in secondary markets

In the last few months, the SEBI chairperson, Madhabi Puri Buch, has consistently underscored the introduction of a system that is akin to ASBA for secondary markets. Now, it is clear that the regulator is seriously working to come out with an ASBA like structure for the secondary markets at the earliest and stakeholders have already been involved in the discussions. The Application Supported by Blocked Amount (ASBA) structure is currently applicable to the primary markets wherein the IPO funds only get blocked on application and get debited only on allotment. By extending this system to secondary markets, SEBI wants to divorce the role of brokers from managing the client funds.

In the ASBA system, there is an explicit authorisation to block the application money in the bank account. While such blocked amounts cannot be used for any other checkable expenses, the investors continues to earn interest on these funds for the period till the allotment debit happens. In the event of proportionate allotment or non-allotment of shares, the funds for the unallotted portion is automatically released. This does away with the convoluted process of issuing cheques and then waiting for refunds, while losing the float to the issuer company. SEBI’s argument now is that if such a system can be implemented in the secondary markets, then why not in the primary markets.

Let us quickly look at how the ASBA system works in primary markets. When an application is made, equivalent funds are blocked in the ASBA bank account. Such funds cannot be used for any other purposes. However, once the allotment is finalized, then based on the number of shares allotted the ASBA bank account will be debited and the balance funds would be released for regular use. By extending this to secondary markets, brokers would no longer be collecting margins from the clients but it will be just be a block on the bank account. This will not matter much for banks-cum-brokers like ICICI, HDFC, Axis; since it anyways works like a quasi-ASBA. However, it could matter for non-bank brokers.

One argument in favour of ASBA based secondary market trading is that with trading, clearing and settlement moving online; it is time to plug the loopholes in the investing front end in secondary markets. The second argument is more pragmatic. After the Karvy scam in November 2019, the spotlight has turned on the way some brokers had misused funds of clients. According to SEBI, this has to be prevented at a systemic level and one way to prevent such potential for mischief is to introduce ASBA in secondary markets. That would make the entire system transparent and system driven, with brokers out of fund system.

It is not like the situation has not improved. It has actually become much better in terms of integrity of client funds. Currently, client funds are reasonably well segregated from the brokers’ own funds. As we mentioned earlier, for the bank-based brokers, there is already an ASBA like system in place for the secondary markets. However, the problem is with the brokers that do not have the backing of a bank. However, even in the case of such brokers, the client funds and broker funds are held in two different accounts. There is sufficient mapping of client funds to the client ledger, so you can say ASBA is there is an extent.

The so-called ASBA-like system for secondary markets is already being used by bank-led brokers. Hence for them, it is not going to be much of a difference in terms of operational execution. However, for the non-bank brokers the need of the hour is alterations to the trading software and systems. For the clients, the benefit will be that unutilised trading funds can earn interest in the bank accounts. More importantly, their funds are safe in their own bank accounts. For the brokers, it may mean a loss of float and they may be forced to increase their commission charges. We have to wait and see how this new system evolves.

One concern is that such a move would impact volumes. While client volumes may not be impacted, the proprietary volumes can be negatively impacted. If you look at the volume mix today, proprietary trading by market intermediaries on their own books accounts for 27% of cash market volumes and 50% F&O volumes. Much of these funds are client funds and that could take a hit. This is also likely to reduce the leverage provided by brokers to the clients. So short term volume impact would certainly be there, although it is expected to be value accretive in the long run.