Block mechanism in demat must for share sale transactions from Nov: Sebi

Markets regulator Sebi on Friday made it mandatory for investors to block securities on their respective demat accounts for sale transactions.

Currently, the facility is optional for investors.

The block mechanism in the demat accounts of clients undertaking sale transactions would become mandatory from November 14, the Securities and Exchange Board of India (Sebi) said in a circular.

Under the mechanism, shares of a client intending to make a sale transaction will be blocked in the client's demat account in favour of the clearing corporation concerned.

In July, the regulator decided to introduce the concept of a block mechanism, whereby investors have an option to block securities in their respective demat accounts for sale transactions from August 1.

The option of an early pay-in method is also available. Under this option, shares are transferred from a client's demat account to the clearing corporation concerned's account. If the sale transaction is not executed under the early pay-in mechanism, then those shares are returned to the client's account and the process takes time and involves a cost.

After extensive consultation with depositories, clearing corporations and stock exchanges, and considering the benefits of the block mechanism, Sebi has now decided that the "facility of block mechanism shall be mandatory for all early pay-in transactions".

In case the sale transaction is not executed, shares will continue to remain in the client's demat account and will be unblocked at the end of the T (Trade) day. Blocking of shares will be on a 'time basis'.

Sebi said depositories and clearing corporations will have to put in place an appropriate system by participants or members to make available the block mechanism for clients in the securities market.

Under the block mechanism, securities lying in the client's demat account will be blocked either by the client using a depository's online system or eDIS mandate or through the depository participant based on physical DIS (Delivery Instruction Slip) given by the client or Power of Attorney (PoA) holder.

Depositories can block the securities in the client's demat account in respect of intra or inter-depository transfer instruction till pay-in day. Only after reviewing the client-level net delivery obligation obtained from clearing corporations can the blocked securities be transferred.

Depositories will also provide clearing organisations with information on transfer orders so that clients can take advantage of the early pay-in benefit.

According to Sebi, if securities for sale are blocked in the depository system in favour of a clearing corporation, all margins would have deemed to have been collected and penalty for short or non-collection of margins, including other margins should not arise.