Application Supported by Blocked Amount (ASBA)
WHY IN NEWS ?
- Recently 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.
WHAT IS ASBA ?
- ASBA abbreviated as Application Supported by Blocked Amount is an IPO application process developed by SEBI
- It is an application containing an authorization to block the application money in the bank account, for subscribing to an IPO issue.
- You cannot use the blocked amount for any purpose.
- However, you can continue to earn interest in the blocked amount.
- If you are a non-retail investor wanting to invest in IPO, it is mandatory to apply through ASBA.
- An SCSB is a recognised bank capable of providing ASBA services to its customers.
BENEFITS OF ASBA
- Here are some of the unique benefits for investors applying through ASBA process:
- When money is blocked in your bank account, you do not lose out on interest income. You continue to earn interest on the blocked amount.
- The ASBA eliminates the need to pay money via cheques and demand drafts.
- The ASBA facility is hassle-free and does not involve any cost. You can easily apply via Netbanking without submitting any physical documentation.
- The investors need not worry about the refunds. In case there is no allotment of shares, the money is unblocked from your bank account for further use.
- The blocked amount is considered while calculating the Average Quarterly Balance in the account.
MORE ABOUT THE DEVELOPMENT
- The markets regulator 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, wherein the initial public offering(IPO) funds only are blocked on application, and are debited only on allotment.
- The extension of ASBA to secondary markets means brokers will no longer collect margins from clients.
- Thus only a block will be placed on the bank account.
- This will not matter much for banks-cum-brokers such as ICICI, HDFC, and Axis, since it anyways works like a quasi-ASBA. However, it could matter for non-bank brokers.
FUNCTIONING OF ASBA IN PRIMARY MARKET
- In the ASBA system, there is an explicit authorisation to block the application money in the bank account.
- When an investor makes an application for an IPO, a similar amount of funds are blocked in the ASBA bank account.
- Such funds cannot be used for any other purposes.
- However, once the allotment is finalised, based on the number of shares allotted, the ASBA bank account will be debited, and the balance funds will be released for regular use.
How will the ASBA facility benefit retail investors in the secondary market?
- 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.
- 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.
- 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.
- The markets regulator said the facility will bring efficiency in the secondary market ecosystem by allowing usage of the same blocked amount towards margin and settlement obligations.
- It will result in lower working capital requirements for members.
Under the proposed framework, stock brokers will be allowed to either directly settle the brokerage with the UPI clients or opt for CC’s facility to deduct standard rate of brokerage from the UPI block of the clients.
IMPACT OF ASBA ON MARKET
- 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.
- The current volume mix shows that proprietary trading by market intermediaries on their own books accounts for 27 per cent of cash market volumes and 50 per cent F&O (future and option) volumes.
- Much of these funds are client funds and that could take a hit. This is also likely to reduce the leverage provided by brokers to the clients.
- So, there will certainly be a short-term volume impact, although it is expected to be value accretive in the long run,
OTHER STEPS TAKEN BY SEBI TO PROTECT SMALL INVESTOR
- 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.
- Earlier this year, 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, and in getting the funds in their bank accounts within 24 hours of the sale of shares.
SYLLABUS: MAINS, GS-3, INDIAN ECONOMY
SOURCE : THE INDIAN EXPRESS
