An Overview of SEBI’s Block Mechanism
Aside from the present early pay-in method, investors will soon be able to block stocks on their separate demat accounts for selling transactions. The “block mechanism” in the demat accounts of clients conducting sale transactions will be available from August 1, according to a circular released by markets regulator SEBI on July 16th 2021.
Shares are transferred from a client’s demat account and returned if the selling transaction is not completed under the Early Pay-In (EPI) mechanism. Shares of a client planning to initiate a sell transaction will be restricted in the client’s demat account in favour of the clearing corporation concerned under the block mechanism.
Shares will stay in the client’s demat account and will be unlocked at the conclusion of the T (Trade) day if the sale transaction is not completed. Shares will be blocked on a ‘time basis.’ The planned block method is an optional feature, and the EPI system will continue, according to SEBI.
Further Key Takeaways
The latest judgement was reached after the watchdog received representations from clients involved in selling transactions. If stocks remain unsold during the early pay-in process, they must be redirected to the depositor’s account, which requires patience and costs money. Participants or members will have to put in place a suitable system via depositories and clearing organisations to make the block mechanism available to clients in the securities market, according to SEBI.
The securities in a customer’s demat account will be stopped either by the client via the depository’s online system or eDIS mandate, or by a depository participant based on a physical DIS (Delivery Instruction Slip) given by the client or a Power of Attorney (PoA) holder, according to SEBI.
Depositories can hold securities in a client’s demat account until the pay-in day for intra or inter depository transfer instructions. Only after reviewing the client level net delivery obligation obtained from clearing corporations can the blocked securities be transferred. Depositories will also supply clearing organisations with information of transfer orders so that clients can take advantage of the EPI benefit. The success of the transaction is also contingent on whether or not the orders are identical.
If clearing corporations give EPI benefits to clients, brokers or clients will not be able to unblock stocks. “When a client wants to block stocks for a sell transaction, the shares will be blocked in the clearing corporation’s favour. If securities are blocked in favour of a clearing business, all margin is considered to have been collected, and there is no penalty for short/non-collection of margin, including additional margins “, SEBI remarked.
The Securities and Exchange Board of India (SEBI) has simplified margin-related procedures for stock market sellers. In the cash market, stock brokers no longer need to collect advance margin from sellers. They can request that the depository player that holds a client’s demat account block the shares that are to be sold and then release them at the end of the day if the sale does not go through.
According to SEBI’s new block system, the shares do not need to be transferred to the broker’s account for the sale. The electronic delivery instruction slip can be used to offer the instruction to block the client’s shares (eDIS). Brokers have been saying that since SEBI tightened margin requirements last year, clients have been flocking to online bargain brokers.
According to investors, the DIS was previously used by few brokerages to restrict client shares, but that this technique will soon be extensively employed. Also, some argue that SEBI’s block mechanism isn’t entirely novel, given that brokers had already implemented an early pay-in mechanism for shares sold. Brokers indicated that in this case, shares sold are delivered the same day, and a pre-assigned client power of attorney (PoA) is utilised solely for this purpose.
Shares in a client’s demat account will be stopped either by the customer via the depository’s online system or an eDIS mandate, or by a depository participant based on the client’s physical DIS or via a PoA. Depositories may hold securities in a client’s demat account until the pay-in day for intra or inter depository transfer instructions. The banned securities will only be transferred after being compared to the client level net delivery obligation obtained from stock exchange clearing organisations, according to SEBI.
All of these systems are being streamlined so that SEBI can provide the same-day settlement process. If the sell order is not executed, the block on shares will be lifted by the end of the day, according to SEBI. The early pay-in system, which allows shares to be delivered the same day, will also be maintained. The core of the settlement procedure after the purchase/sale of shares is the pay-in and pay-out methods.
Currently, Indian markets use T+2-day settlement, which means that shares are delivered and paid out three days after they are sold. Within SEBI, there is a desire to make this a same-day process.