UPI Block Mechanism

31st August, 2024 Economy

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Context

The Securities and Exchange Board of India (SEBI) has suggested that large stockbrokers should provide their clients [including individuals and Hindu Undivided Families (HUFs)], with the option to trade using the UPI block mechanism in the cash segment.

What is UPI Block Mechanism?

The Reserve Bank of India-approved UPI with the facility of blocking funds was introduced in January 2019 for public issues. The beta version for secondary market trading was launched on January 1, 2024, for individuals and HUFs, and currently applies only to the cash segment.
In the UPI block mechanism, clients can trade in the secondary market using funds that are blocked in their bank accounts instead of transferring money upfront to the trading member.
Currently, this facility is optional for investors, and it is not mandatory for Trading Members (TMs) to offer it as a service to their clients.

New Development: SEBI’s Recommendation for QSBs

SEBI has suggested that Qualified Stock Brokers (QSBs) must provide the UPI block mechanism for trading in the cash segment to their clients, including individuals and Hindu Undivided Families (HUFs), with a phased implementation plan.

Note: A Qualified Stock Broker (QSB) is a stock broker that handles a large volume of trading and clients, and has a significant impact on the market. Trading Members are classified as Qualified Stock Brokers (QSBs) based on factors like the number of active clients and trading volume. QSBs have enhanced responsibilities and are subject to stricter monitoring.

This implies, large stockbrokers in secondary market should provide their clients with the option to trade using the UPI block mechanism in the cash segment.

3-in-1 Trading Account Facility

SEBI also suggested that QSBs could offer a “3-in-1 trading account facility” as an alternative to the mandatory ASBA-like facility (of Primary Market). This facility allows clients to keep their funds in their bank accounts, earning interest on cash balances, and it applies to both cash and derivatives segments without restrictions on amounts.

3-in-1 Account

A 3-in-1 Account integrates a Savings Account, Trading Account, and Demat Account into one seamless package. This setup allows for easy management of funds and securities:

Savings Account: Used to park and manage funds.
Trading Account: Facilitates buying and selling of securities.
Demat Account: Holds the purchased securities in electronic form.

Traditionally, separate accounts with different institutions require time-consuming transfers between accounts for trading activities. With a 3-in-1 Account, funds are directly allocated from the Savings Account to the Trading Account, and securities are automatically moved to the Demat Account, streamlining the trading process and reducing transfer times.

ASBA-Like Facility in the Primary Market

An Application Supported by Blocked Amount (ASBA)-like facility already exists in the primary market. This ensures that investor funds are only moved when an allotment is made.

Application Supported by Blocked Amount

ASBA stands for Application Supported by Blocked Amount. It's an IPO application process developed by SEBI, where funds are blocked in a bank account until the IPO allotment process is complete. Here are some key aspects:

Purpose: Blocks the application money in the investor's bank account for IPO subscriptions. This amount cannot be used until the IPO allotment is finalized, but interest continues to accrue.
Mandatory for Non-Retail Investors: Non-retail investors must use ASBA for IPO applications.
Debit and Refund: Money is debited only if the application is successful. If not, or if the issue is withdrawn, the amount is refunded.

Eligibility Criteria:

Indian resident investor.
Valid PAN, Demat, and trading accounts.
Funds must be blocked in a bank account through self-certified Syndicate Banks.
Sufficient balance in the bank account.
Bid must be at cutoff with a single share option.
No bids under reserved categories.
Agreement to terms without revising bids.

Benefits:

Interest Income: Earn interest on blocked funds.
Eliminates Paperwork: No need for cheques or demand drafts.
Convenience: Apply via Netbanking without physical documents.
Refunds: Money is unblocked if shares are not allotted.
Balance Calculation: Blocked amount is considered for Average Quarterly Balance calculations.

Comparison Between UPI Block Mechanism and 3-in-1 Accounts

The 3-in-1 trading accounts provide lower, yet adequate, protection compared to the UPI facility, as the pay-in and pay-out of funds are routed through TMs.

Potential Benefits of UPI block mechanism for Retail Investors

SEBI anticipates that the UPI block mechanism may become popular among retail investors.
Clients who use this mechanism will benefit from earning interest on the funds in their bank accounts since the money remains in their accounts rather than being transferred to the TM.

TRIVIA

Member Type	Description	Eligibility Criteria
Trading-cum-Clearing Member (TCM)	Entitled to trade on their own account and their clients' accounts. Can also clear and settle trades themselves.	Corporates Registered Partnership Firms Limited liability partnerships (LLPs) Sole Proprietors/Individuals (Proprietary Firms)
Institutional Trading-cum-Clearing Member (ITCM)	Can trade on their own and clients' accounts, and clear and settle trades for themselves, trading members, and TCMs.	Companies or Institutions
Professional Clearing Member (PCM)	Can only clear and settle trades executed by trading-cum-clearing members or trading members.	Companies or Institutions
Trading Member (TM)	Can trade on their own and clients' accounts but cannot clear and settle trades. Must be affiliated with an ITCM or PCM.	Corporates Registered Partnership Firms Limited liability partnerships (LLPs) Sole Proprietors/Individuals (Proprietary Firms)

READ ALL ABOUT UPI: https://www.iasgyan.in/daily-current-affairs/upi-4

READ ALL ABOUT IPO: https://www.iasgyan.in/daily-current-affairs/ipo-or-initial-public-offering#:~:text=An%20unlisted%20company%20(A%20company,public%20in%20the%20primary%20market.

PRACTICE QUESTION

Q. Which of the following statements is correct about a Professional Clearing Member (PCM)?

A) Can trade and clear and settle trades on their own and clients' accounts.
B) Can only clear and settle trades executed by trading-cum-clearing members or trading members.
C) Can trade on their own and clients' accounts but cannot clear and settle trades.
D) Can clear and settle trades for themselves, trading members, and TCMs.

Answer: B) Can only clear and settle trades executed by trading-cum-clearing members or trading members.

SOURCE: HINDUBUSINESSLINE

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