In the margin

ASBA-like system will benefit retail investors

Securities and Exchange Board of India Chairperson Madhabi Puri Buch’s announcement that the markets regulator is considering extending the concept of application supported by blocked amount, or ASBA, to the secondary market has interesting implications. It could smooth out trading for retail investors and enable individuals to earn interest while maintaining market exposure. But it could also result in a massive competitive advantage for banks, which do also offer securities broking services and hurt standalone brokerages and fintechs. ASBA as it stands has proved to be a boon for retail investors in the primary markets. It allows an investor to subscribe to an initial public offering (IPO) while placing a lien on the exact funding necessary. In case the investor receives full or partial allotment, the exact amount required is debited, and the requisite number of shares transferred. If allotment does not happen in the case of high oversubscription, or an incorrect application, the lien is removed. Either way, the money remains in the investor’s bank account and continues to generate interest, assuming it is an interest-bearing account.

This is a relatively easy process in the case of an IPO. An IPO is a static process with few entities involved. The procedure is “apply, wait, and either receive an allotment or not”. There is only one security involved, only one agency handling the allotment, and only two agencies handling demat accounts. Reconciling IPO accounts is not that difficult. Secondary-market operations are far more dynamic, and involve more stakeholders. When an investor bids to buy a share, that individual is operating via a broker. The bid order is sent to the exchange, or to both exchanges in the case of a smart order routing. It is matched against asks (sell orders) and if it is executed, the funds and shares are transferred, which means the involvement of the exchange, another brokerage, and the depositories. It is more complicated in the case of margin trades and the bulk of the intra-day trades are on margin with a massive volume of trades occurring every second.

It is currently the norm for standalone brokerages to ask for funds to be transferred (or for investors to keep cash and shares on deposit with the brokerage for margin trades) before they execute a trade. While the brokerage account may be interest-bearing, it can also be the case that brokerages misuse funds and shares they hold on behalf of clients, and delays and default do occur. Banks that possess their own securities-trading arms have an advantage in that they can already institute a version of ASBA by tapping directly into the client’s bank accounts. The standalone brokerages compensate for this in a highly competitive market by charging lower fees and offering more flexibility in terms of margins, and more in the way of advisory support.
 

If an ASBA is mandated without thought, that existing advantage will tilt more sharply in favour of banks that already offer “3-1” accounts where their subsidiary trading arm can access the bank account and the demat holdings. Standalone brokerages may also have to invest large sums in creating infrastructure or offer high interest rates on cash deposited with them to support ASBA. So while this is a good initiative in theory and will help retail investors, the details need to be worked out carefully while keeping competitive considerations in mind. It can be introduced in a phased manner with feedback from stakeholders.