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For stock trading SEBI plans to implement new payment mechanism

The Securities and Exchange Board of India (SEBI), which oversees India’s stock exchanges and capital markets, intends to modify the way payments are made for stock market trades.

If used, the new payment mechanism would ensure that investors’ funds are more protected and that the likelihood of abnormalities is reduced.

The SEBI is engaged in negotiations and debates with several capital market parties, including intermediaries, about a reform in the payment method for trading, according to a report by the Economic Times. The proposed modification would guarantee that funds associated with a stock trade would only leave the investor’s bank account once the trade was finished.

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Currently, if an investor purchases stock from the market, the money is sent from the bank account of the investor to the stock broker (intermediary). Since the settlement corporations take more than one day to settle the trade purchase, the money sent by investors is kept by stock brokers.

Once the stock market settlement is complete successfully, the stock broker transfers the respective amount to the clearing corporations.

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There have been several incidents in the previous three years in the realm of the stock market where stock brokers, who were supposed to store the money safely with them, instead stole the money that was meant to be sent to the clearing firm following settlement. Even securities offered as collateral were sometimes taken in rare cases.

In 2019, SEBI and the National Stock Exchange filed a complaint against Karvy Stock Broking Limited for allegedly misusing their clients’ (investors’) securities by transferring them to another company.

The market was alarmed by this incidence, and authorities immediately began to explore for measures to prevent such occurrences in the future.

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In the case of transactions and investments connected to initial public offerings, a comparable payment mechanism to the one being considered by SEBI is currently in operation.

The “Application Supported by Blocked Amount” fund blocking application makes sure that the payment for investments is only completed after the shares from the IPO have been distributed.

As part of the system, investors ask their banks to set aside a specific sum of cash for the investment. According to the specific number of shares granted to the investor, the appropriate sum is deducted.

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The function of stock brokers as an intermediary to stock market settlements would be severely constrained with the introduction of the ASBA system to the secondary market. Additionally, it would restrict their capacity to examine and investigate the flow of money in the market.

The underlying infrastructure of the secondary capital markets in India has previously been the subject of discussions between SEBI and NPCI and other comparable intermediaries.

Additionally, it is anticipated that some stock brokers would oppose the new initiative since it would minimise their position and limit their ability to serve as intermediates.

SEBI has not yet issued any formal pronouncements or reactions to the report.

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