In News:

The Unified Payments Interface (UPI) block mechanism is an emerging reform in India’s capital markets aimed at enhancing investor protection and fund safety in secondary market trading. Recently, the market regulator Securities and Exchange Board of India (SEBI) proposed making this facility mandatory for Qualified Stock Brokers (QSBs), drawing parallels with the well-established Application Supported by Blocked Amount (ASBA) system used in the primary market.

What is the UPI Block Mechanism?

• It allows investors to trade in the secondary market using funds blocked in their bank accounts, rather than transferring money upfront to the trading member.
• The actual debit occurs only when a trade is executed, while the remaining funds stay safely in the investor’s bank account.
• The mechanism is conceptually similar to ASBA, but extended to secondary market transactions.

Key Features

• Funds remain in the investor’s bank account, with only a lien/block created.
• Reduces the risk of misuse or diversion of client funds by intermediaries.
• Currently optional for investors and not mandatory for trading members, though SEBI has proposed mandatory adoption for QSBs.
• SEBI has also sought feedback on whether a “3-in-1 trading account” (bank + demat + trading) can be allowed as an alternative.

Role of Qualified Stock Brokers (QSBs)

• Trading members are classified as QSBs based on:
  • Number of active clients
  • Total client assets held
  • Trading volumes
  • End-of-day margins
• Being a QSB entails higher regulatory responsibilities and compliance standards.
• SEBI’s proposal targets QSBs first due to their scale and systemic importance.

Link with ASBA

Application Supported by Blocked Amount (ASBA):

• Introduced by SEBI in 2008.
• Mandatory for IPOs and rights issues.
• Allows investors to apply for issues by blocking funds in their bank account, with debit only after allotment.
• Prevents premature transfer of investor money and improves transparency.

The UPI block mechanism mirrors this principle but applies it to secondary market trading.

Regulatory Background

• UPI, developed by the National Payments Corporation of India (NPCI) and regulated by the Reserve Bank of India (RBI), was launched in 2016.
• SEBI mandated UPI-based payments with fund blocking for IPO applications in 2019.
• In January 2024, SEBI introduced a single-block, multiple-debits UPI mechanism for secondary market use, paving the way for the current proposal.

Significance

• Enhanced investor protection by keeping funds under the investor’s control.
• Improves trust and transparency in secondary market operations.
• Aligns with SEBI’s broader objective of segregation and safety of client funds.
• Reduces settlement risk and strengthens market integrity.