ASBA-like Facility for Secondary Trades

What’s in today’s article?

• Why in news?
• News Summary: ASBA-like facility for secondary trades
• What is ASBA?
• What has SEBI done?
• How will the ASBA facility benefit retail investors in the secondary market?
• Will this facility impact the markets?
• What other steps has SEBI taken to protect small investors?

 

Why in news?

• The capital markets regulator, Securities and Exchange Board of India (SEBI), approved a framework for Application Supported by Blocked Amount (ASBA)-like facility for trading in the secondary market.
• The facility will be optional for investors and stock brokers.

 

News Summary: ASBA-like facility for secondary trades

• Recently, SEBI approved key proposal with regard to introducing an ASBA-like mechanism for secondary trades.

 

What is ASBA?

• About
  • Application Supported by Blocked Amount (ASBA) was first introduced by SEBI in 2008.
  • It is a process for making initial public offerings (IPOs) or rights issue subscriptions. 
  • ASBA is a facility provided by banks that allows investors to apply for an IPO or rights issue by blocking the application amount in their bank account instead of transferring the money to the issuer.
    • Under ASBA, the investor's application money remains in their bank account, and only a block is created on the funds for the IPO application amount. 
    • This blocked amount remains in the investor's bank account until the allotment process is completed. 
    • Once the shares are allotted to the investor, the block is released, and only the amount for the allotted shares is deducted from the investor's account.
  • In public issues and rights issues, all investors have to mandatorily apply through ASBA.
• Importance
  • ASBA is a more convenient and efficient way of applying for IPOs as it eliminates the need for the investor to transfer funds to a separate account for IPO subscription. 
  • It also reduces the time taken for refunds in case of unsuccessful allotments.

 

What has SEBI done?

• Recently, SEBI gave its nod for an ASBA-like facility for secondary market trading. 
• The facility is based on the blocking of funds for trading in the secondary market through UPI (Unified Payments Interface).
  • At present, ASBA is available for the primary market.

 

How will the ASBA facility benefit retail investors in the secondary market?

• Earning of interest till fund gets debited
  • ASBA in secondary market trading will ensure that clients will continue to earn interest on the blocked funds in their savings account till the debit takes place.
• Client-level settlement visibility
  • There will be direct settlement with Clearing Corporation (CC), without passing through the pool accounts of the intermediaries. 
  • Hence, it will provide client-level settlement visibility to CC, and help avoid the risk of co-mingling of clients’ funds and securities.
• Hassle-free transaction
  • It will eliminate the custody risk of client collateral, which is currently retained by the members, and is not transferred to the CC. 
  • There will be hassle-free and immediate unblocking of client’s funds and/ or return of securities in case of member default.
• Efficiency in the secondary market
  • The facility will bring efficiency in the secondary market ecosystem by allowing usage of the same blocked amount towards margin and settlement obligations. 
    • Margin refers to the amount of money or securities that an investor needs to deposit with their broker to buy or sell securities on margin.
    • Settlement obligations refer to the process of delivering securities and making payment for them in a securities transaction.
  • It will result in lower working capital requirements for members.

 

Will this facility impact the markets?

• Market participants feel that the ASBA-like system for the secondary market would impact volumes.
• While client volumes may not be impacted, the proprietary volumes can be negatively impacted.
  • Proprietary volumes in the secondary market refer to the trading activity of a firm using its own capital rather than on behalf of a client.

 

What other steps has SEBI taken to protect small investors?

• SEBI had earlier introduced quarterly settlement of funds and transfer of funds from depository participants (DP) to bank accounts on the first Friday of the quarter (April, July, Oct, Jan).
• For clients who have opted for monthly settlements, the running account is allowed to settle on the first Friday of every month. 
  • If the first Friday is a trading holiday, the settlement happens on the previous trading day.
• A new trade-plus-one (T+1) settlement cycle was introduced, which means that trade related settlements will be done within a day, or 24 hours, of the completion of a transaction.
  • The move helps investors in reducing the overall capital requirements with margins getting released on T+1 day.

 

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Q1) What is Initial Public Offerring (IPO)?

An Initial Public Offering (IPO) is the process by which a privately held company offers shares of its stock to the public for the first time, allowing the company to raise capital by selling ownership stakes to investors. IPOs are often used by companies to raise funds for expansion or other purposes, and can also provide liquidity for existing shareholders who want to sell their shares. 

 

Q2) What is secondary market?

A secondary market is a financial market where securities that have already been issued by companies are bought and sold by investors. In other words, it is a market where existing stocks, bonds, and other financial instruments are traded, as opposed to a primary market where new securities are issued. 

 

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Source: How ASBA-like facility for secondary market trading benefits customers | Financial Express