The Securities and Exchange Board of India (SEBI) is ushering in a new era of efficiency and convenience in the Indian securities market. In July 2023, SEBI announced its plans to launch real-time settlement of trades, marking a significant stride towards revolutionizing the market infrastructure. Building upon this momentum, SEBI is now gearing up to introduce a one-hour settlement of trades, setting the stage for instantaneous trade settlement. Additionally, a game-changing Application Supported by Blocked Amount (ASBA)-like facility for secondary market trading is on the horizon, set to be launched in January 2024.
About Application Supported by Blocked Amount (ASBA)
Application Supported by Blocked Amount (ASBA) was first introduced by SEBI in 2008. It is a process designed for subscribing to Initial Public Offerings (IPOs) or rights issues. This innovative facility enables investors to apply for an IPO or rights issue by blocking the application amount in their bank account, rather than transferring the funds to the issuer. Under ASBA, the investor’s application money remains in their bank account, with only a temporary block created on the funds for the IPO application amount. This block remains until the allotment process is completed. After share allotment, only the amount for the allotted shares is deducted from the investor’s account. ASBA has proven to be a convenient and efficient way of applying for IPOs, eliminating the need for fund transfers to a separate account and reducing the time taken for refunds in case of unsuccessful allotments.
ASBA-like Facility for Secondary Market Trading
SEBI’s recent announcement about the introduction of an ASBA-like facility for trading in the secondary market is a game-changer. Currently available only for the primary market, ASBA will now extend its convenience to secondary market transactions. While primary market deals with the issuance of new securities to investors, the secondary market facilitates the buying and selling of existing securities. The ASBA-like facility for secondary market trading will be based on the blocking of funds through the Unified Payments Interface (UPI).
Benefits for Retail Investors in the Secondary Market
- Earning Interest Till Fund Debit: One of the primary advantages of ASBA in secondary market trading is that clients will continue to earn interest on their blocked funds until the debit takes place. This ensures that investors do not miss out on any potential interest income during the trading process.
- Client-Level Settlement Visibility: The direct settlement with Clearing Corporation (CC) without passing through intermediary pool accounts provides transparency in client-level settlements. These safeguards against the risk of co-mingling clients’ funds and securities, enhancing accountability and security.
- Hassle-Free Transactions: The ASBA-like facility eliminates the custody risk of client collateral that is currently retained by members and not transferred to the CC. In the event of a member default, there will be hassle-free and immediate unblocking of client’s funds and/or the return of securities.
- Efficiency in the Secondary Market: By allowing the use of the same blocked amount towards margin and settlement obligations, this facility streamlines the secondary market ecosystem. This efficiency reduces the working capital requirements for market participants, making trading more accessible and cost-effective.
One-Hour Trade Settlement: A Game-Changer
Trade settlement is a crucial aspect of financial markets, involving the transfer of funds and securities between buyers and sellers. In the current T+1 (Trade Date plus one day) cycle, settlements occur within 24 hours of the actual transactions. India adopted the T+1 settlement cycle in January 2023, becoming the second country globally to do so for top-listed securities after China.
The concept of one-hour settlement represents a radical shift towards faster and more efficient trade settlements. It signifies that securities transactions are settled within just one hour of trade execution, ensuring rapid transfer of securities and funds. According to SEBI, this one-hour settlement is a stepping stone towards achieving instantaneous settlement, which would mark an even more significant milestone in market infrastructure.
Benefits of One-Hour Trade Settlement
- Reduced Counterparty Risk: Shorter settlement cycles reduce exposure to counterparty risk, as obligations are settled quickly, minimizing the risk of default by either party.
- Enhanced Liquidity: Faster settlement enhances market liquidity, as investors can access their funds more quickly after selling securities. This improved liquidity can attract more participants to the market.
- Lower Margin Requirements: Traders may require lower margin or collateral when they know that settlements will occur rapidly. This can reduce the cost of trading and make it more accessible to a broader range of investors.
- Reduced Market Risk: Shorter settlement cycles minimize market risk since the market price of securities is less likely to change significantly between the trade execution and settlement. This stability benefits both buyers and sellers.
UPSC Mains Questions
- What potential challenges might SEBI face in implementing one-hour trade settlement, and how can these be mitigated?
- How could the shift to one-hour trade settlement impact market dynamics and the behavior of retail investors?
- What are the implications of extending the ASBA-like facility to the secondary market for the overall investor experience and market stability?
- What role might technological advancements play in achieving one-hour trade settlement and enhancing the efficiency of secondary market trading?
