After an active consultation with Depositories, Clearing Corporations (CC) and Stock Exchanges, the Securities Exchange Board of India (SEBI) has decided to provide 'Block Mechanism' in the Demat account of clients undertaking sale transactions.
To simply spell out SEBI's 'Block Mechanism' - when any client intends to make a sale transaction, shares will be blocked in the Demat account of the client in favour of Clearing Corporation. But, if the sale transaction is not executed, shares shall continue to remain in the client’s Demat account and will be unblocked at the end of the T day. The mechanism would do away with the movement of shares from the client’s Demat account for early pay-in and back to the client's Demat account if the trade is not executed.
The move from the market regulator came after it received representations from the clients undertaking sale transactions, wherein the clients give Early Pay-In (EPI) for sale trades which are yet to be executed. Currently, if the sale trade gets executed, then securities get adjusted against EPI and if securities remain unsold, then the securities are required to be transferred to the client’s account. The existing process takes time and it also involves cost.
SEBI has elaborately stated the process for 'Block Mechanism'. Under this mechanism, Clearing Corporation will match the client obligations with the block details provided by depositories and will provide EPI benefit to the client if the obligation exists for that client. If the order is not executed by the end of the trade (T) day, the block should be released. The proposed facility of Block Mechanism is on an optional basis and EPI mechanism shall continue," SEBI said.
The securities lying in the client's Demat account will be blocked either by the client himself using the depository’s online system or eDIS mandate or through depositor participant based on physical DIS given by client or Power of Attorney (POA) holder.
Importantly, the broker or client shall not be allowed to unblock securities if EPI benefit is provided by CC to a client for the same.
Further, SEBI added, when the client intends to block securities for a sale transaction, shares will remain blocked in favour of CC. If securities are blocked in favour of CC, then all margins would be deemed to have been collected and penalties for short/non-collection of margin including other margins shall not arise. Also, Blocking shall be on a 'time basis' and would mean if the order is not executed by the end of the T day, the block shall be released.
The facility of Block Mechanism will be available to the clients from August 1.