The Securities and Exchange Board of India (Sebi) on Monday mandated all qualified stockbrokers to provide their clients with a unified payments interface (UPI) for blocking funds or a 3-in-1 trading system to trade in the secondary markets.

From 1 February 2025, all qualified stockbrokers must offer either the UPI-blocked trading facility or the integrated 3-in-1 trading account.

A UPI block mechanism enables investors to set aside funds in their bank accounts for stock trading, rather than transferring the funds to a trading member. Introduced by Sebi in January 2019, this UPI block mechanism initially served as a payment method for retail investors participating in public share issues in the primary markets. Following its successful implementation, Sebi expanded its use to secondary markets in January this year. A beta version of this mechanism was rolled out for individual investors and Hindu Undivided Families (HUFs), applicable only to the cash trading segment. Currently, the use of this mechanism is optional for trading members.

The 3-in-1 account facility, which some brokers already offer, combines an investor’s trading, demat, and bank accounts into one integrated platform. This system automatically blocks the required funds for buy orders and blocks securities in the demat account for sell orders, ensuring greater convenience and control for investors. If the trade is not executed, the funds and securities are promptly released.

What Sebi aims for

Sebi’s UPI-based fund blocking mechanism aims to mitigate risks associated with defaults by trading members and clearing members. This initiative, outlined in Sebi’s Master Circular dated 16 October 2023, is designed to provide enhanced protection for cash collateral in the market.

Anirudh Garg, partner and fund manager at Invasset PMS, said the circular is of great importance as it gives investors more control over their funds and is crucial for reducing risks associated with counterparty defaults. “Blocking of funds or securities in client accounts means that when it comes to uninterrupted trading, there are investments which can never be lost. In addition, there are also alternative features available because investors may choose to go for the old way of doing things or the new facilities which have been introduced” he said.

Garg believes that both direct and indirect measures could lead to an increase in confidence and participation from low-risk investors. “Also, the obligatory application of this system by 2025 is a very good advance towards protecting the investors,” he said.