Under the UPI lock mechanism, clients can trade in the secondary market based on funds locked in their bank accounts, instead of transferring the funds in advance to the trading member.
Currently, the facility is optional for investors and it is not mandatory for Trading Members (TM) to offer it as a service to clients.
The app is supported by an Asset Blocked Amount (ASBA)-like facility already available for the primary market, which ensures that an investor’s money moves only when an allocation occurs.
In its consultation paper on Wednesday, SEBI suggested that QSBs should provide the facility of trading using UPI block mechanism in the cash segment to their customers (individuals and HUFs) with an appropriate roadmap for its implementation.
Furthermore, it has been suggested that QSBs may offer a “3-in-1 merchant account facility” as an alternative to making the ASBA-like facility mandatory.
In the case of 3-in-1 trading accounts, clients would have their funds in their bank account, earning interest on cash balances.
Further, the 3-in-1 facility would be available for both cash and derivatives segment, without any amount restriction, while the trading facility using UPI block mechanism will currently be available only for the cash segment with some restrictions on the number of blocks allowed on a daily basis, SEBI said.
“However, compared to the UPI facility, the 3-in-1 merchant account facility provides adequate, albeit lesser, protection to customers, considering that deposit and withdrawal of funds are done through TMs,” he added.
The Securities and Exchange Board of India has invited public comments on the proposals until September 12.
Trading members are classified as qualified broker-dealers (QSB) based on factors such as the size and scale of their operations, including the number of active clients, the total assets held by clients with the TM, the end-of-day spread of all clients, and the trading volume of the TM.
Designation as a QSB carries with it increased responsibilities and obligations. In addition, QSBs are also subject to enhanced oversight by market infrastructure institutions.
The regulator had introduced the use of the RBI-approved Unified Payments Interface (UPI) with fund lock-up facility, as a payment mechanism for retail investor applications submitted through intermediaries for public issues like IPOs from January 2019.
The Beta version of blockchain trading for secondary markets was launched on January 1, 2024, for individuals and HUF, and became applicable only to the cash segment.
Currently, the facility is optional for investors and not mandatory for trading members to provide it as a service to clients.
SEBI anticipates that this mechanism could eventually become a popular method for retail investors, such as individuals and HUFs, to trade in the securities markets, provided TMs are willing to adopt the system.
“Customers who opt to use the UPI locking mechanism for their secondary market transactions will primarily benefit from the interest generated on the balances held in their bank accounts. This is because under the UPI locking mechanism, these funds remain in their account instead of being transferred to the TM,” SEBI said.
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