SEBI now plans ASBA for secondary markets too

In a recent interview, the SEBI chairperson, Madhabi Puri Buch had mentioned about the plan to shift to the ASBA methodology even for secondary market transactions. Now, ASBA is a very popular payment system for retail investors in the IPO market. In the case of Application Supported by Blocked Amount (ASBA), the IPO money only gets debited to the account of the investors on allotment, although a block is placed at the time of application. As a result, there is no wait for refund for the IPO investors since only the money equivalent to the allotment is debited and for the balance hold, the freeze on funds is removed.

Now, Madhabi Puri Buch wants to extend this same facility to the secondary market transactions wherein investors buy and sell listed stocks in the secondary markets. The million dollar question is how would this ASBA system actually work in the secondary markets in India. According to the SEBI Chairperson, Madhabi Puri Buch, this system would be launched shortly and would make the markets safer and more transparent when it is combined with the T+1 system, which is already being implemented in a phased manner.

Addressing the Global Fintech Fest 2022, Madhabi Puri Buch underlined that a system similar to the ASBA system of IPOs would be extended to the secondary markets too. The implication would be that if you are buying shares in the secondary markets, the money should never leave the bank account until the settlement is done. When this system is combined with the new T+1 settlement mechanism, the SEBI Chair is of the view that it would lead to efficient use of capital and help further develop India’s capital markets.

However, this system is likely to favour the broking houses that are affiliated to the banks. Here is why. If you have a trading account with HDFC Securities or with ICICI Direct for example, the funds don’t leave the bank account, nor do you need to fund the trading account. You can buy shares in the trading account based on the funds available in the bank, although there will be a block on the funds. The debit will only happen at the time of settlement. They would not really be impacted as the float is already with the bank.

However, this could have an impact on the non-bank affiliated brokers or pure brokers as they are known. In the case of these non-bank affiliated brokers, it is mandatory for a client to first fund the trading account by transferring funds from her bank account to the trading account. However, the funds have to paid in only after a day and in many cases the funds are not fully utilized. In such cases, the broker gets the advantage of the float, which would not be available in the new situation since the funds would remain in the bank.

In short, ASBA for the IPO market has been around for more than a decade and there are no issue in that. However, ASBA in secondary markets could be a tad more complex as it favours bank-backed brokers over the regular brokers. The problem is that the block would entail access to the client bank account and most banks may be unwilling to give access to the client bank account for the brokers. That means, the investors may be forced to gravitate towards bank-backed brokers for trading in the stock markets, which is unfair.

Most experts are of the view that while the merits of the ASBA system cannot be doubted, it would be tough operationally. While the IPO market is a one-time payment market, the secondary market is a market that entails continuous payments. There are two issues that would arise in this process. Would an interface between an external bank and broker slow down the entire process. The second question whether this system would give the bank-backed brokers an unfair advantage in the broking market?

However, the system may be a little more complex in the case of intraday trades and derivatives trades. For instance, in futures trades or options selling trades, there is an initial margin that is payable and then there is regular mark to market margins payable. Adding all this to the banking solution is going to be quite complex. Madhabi Puri Buch is clearly committed to making technology play a more prominent role in the clearing and settlement process. The million dollar question is whether it puts some brokers at a disadvantage.