How ASBA will benefit investors trading via non-bank-backed brokerages

The Sebi has embarked upon an ambitious plan to implement an IPO-like payment system for secondary market trading

The Securities and Exchange Board of India (Sebi) has embarked upon an ambitious plan to implement an IPO-like payment system for secondary market trading. The move will benefit individual investors who have trading accounts with non-bank-backed brokerages, like Zerodha.

It will do away with the cumbersome process of moving funds back and forth between their banking account and that of the broker’s. We decode the proposed new system for you:

What is ASBA?
 

Introduced in 2008, ASBA, or application supported by blocked amount, is a payment mechanism used for IPO applications. Earlier, investors had to submit cheques or transfer money online from their account to an escrow account formed for the purpose of an IPO while making an application. Back then, the time period between the close of an IPO and allotment of shares was more than 10 days. As a result, the money moved out of an investor’s bank account irrespective of whether he or she got an allotment.

Come ASBA, this process changed. Under this, the money remained only blocked in an investor’s bank account at the time of subscribing for an IPO. In case of allotment of shares, the exact funds required moved out and in case of no allotment, the entire amount got unblocked.

Why ASBA for the secondary market?

Currently, a semi-ASBA-like system is already in place for investors who have a 3-in-1 bank account, typically offered by bank-backed brokerages. A 3-in-1 account includes a savings bank account, a demat account and a trading account.

Here the money moves out at the time of placing an order and no prior transfer of funds is required. This is possible because the bank provides access to its core banking platform to the brokerage, which is its subsidiary. However, a bank doesn’t do the same for a third-party brokerage. As a result, investors are required to pre-fund their trades.

Come ASBA for the secondary market, investors will be able to place orders by merely ensuring they have adequate funds in their bank account. Like IPOs, the money will move out only when trades get confirmed.

Prevent potential misuse
 

In recent years, there have been several instances of brokers misusing investor’s securities. Brokers were able to access their client’s securities through the power of attorney (PoA) they obtained while opening a trading account. They also gained access to securities pledged by clients as collateral.

To stop such malpractices, Sebi introduced a mechanism called ‘pledge and re-pledge’ and also did away with the practice of PoAs.

Under the new system, investors can use their pledge securities to generate collateral without allowing brokers direct access to their securities. This has addressed the issue around misuse of investor securities.

ASBA for the secondary market will ensure that brokers also don’t get access to the investors’ funds. Currently, brokers earn a float on investor money lying with them. Also, there are instances of brokers not returning idle funds lying with them after a period of 30 days or 90 days as mandated by Sebi.

However, a circular issued by Sebi in June was aimed at ensuring brokers settle the so-called running account of investor’s funds within the stipulated time period.

Implementation challenges

To be sure, Sebi has not issued any circular or set any deadline for the implementation of ASBA for the secondary market. At an event this week, Sebi Chairperson Madhabi Puri Buch said despite the challenges, the new system will be ready in a few months.

While ASBA for the IPO market has been around for more than a decade, extending it to the secondary market could pose more complex challenges, say industry players.

There will be too many instances of blocking and unblocking money for the multiple trades a customer makes in a day. Also, even in ASBA, there are issues like failure rates and more time taken for blocking.

“On the positive side, the entire funds process will standardise. With operational implementation between banks, brokers and other intermediaries, I think it will take some time to be implemented,” says Prakarsh Gagdani, CEO, 5paisa.

Kamlesh Shah, president, Association of National Exchanges Members of India (ANMI), adds, “The margin system will need to be aligned. In F&O (Futures and Options), only the margin is collected. With the new system, there might be a need to give multiple instructions to the bank by the investor. It will become a challenging task for people taking many intraday trades.”