SEBI Mandates UPI-Based Block Mechanism Or 3-In-1 Trading Accounts For Enhanced Investor Protection

In a move aimed at bolstering investor protection, the Securities and Exchange Board of India (SEBI) has directed Qualified Stock Brokers (QSBs) to offer either the UPI-based block mechanism or a three-in-one trading account facility for secondary market trades. The new rule, which will go into effect on February 1, 2025, comes after SEBI worked to protect investors against possible trading member defaults.

The UPI block mechanism ensures that funds remain in a client’s bank account and only get debited upon the successful execution of a trade, similar to the Application Supported by Blocked Amount (ASBA) system used in IPOs. By avoiding the upfront transfer of funds to brokers this strategy seeks to improve investor protection.

Alternatively, the three-in-one trading account integrates a savings account, demat account, and trading account, allowing clients to earn interest on their funds until trades are executed. Both options are designed to provide investors with more secure, flexible, and transparent trading processes. The decision follows the SEBI board’s approval of the proposal in late September 2024, which aimed to introduce these new mechanisms to improve market efficiency and investor security.

Investors will have the choice under the new system to use one of these new facilities or stick with the current practice of sending money straight to trading members. Qualified Stock Brokers may need to offer more trading options beyond their current methods, based on their operating scale and volume.

This decision ensures that investors are better protected against potential broker defaults and is in line with SEBI's ongoing efforts to promote a more transparent and secure trading environment. SEBI intends to increase market efficiency, minimize risks and offer investors greater control over their money by providing these upgraded tools, which will make trading safer for all market participants.

The amendments are scheduled to take effect on February 1, 2025, and market participants and stock brokers have been instructed to make the required modifications.