ASBA

1. Context

2. What is ASBA?

• ASBA, which was first introduced by SEBI in 2008, is an application by an investor that contains authorization to a Self-Certified Syndicate Bank (SCSB) to block in the bank account the application money for subscribing to an issue.
• An SCSB is a recognized bank capable of providing ASBA services to its customers.
• The application money of an investor applying through ASBA shall be debited from the bank account only if her application is selected for allotment after the basis of allotment has been finalized.
• In public issues and rights issues, all investors have to mandatorily apply through ASBA. 

3. What has SEBI done?

• In its board meeting on March 29, 2023, the markets regulator 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 the allotment.
• According to discount stock broker 5paisa, the extension of ASBA to secondary markets means brokers will no longer collect margins from clients; 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.

4. How does ASBA work in the primary market?

• In the ASBA system, there is explicit authorization 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 can not be used for any other purposes.
• However, once the allotment is finalized, based on the number of shares allotted, the ASBA bank account will be debited, and the balance funds will be released for regular use according to 5paisa.

5. 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 a 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 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 the client’s funds and/ or return of securities in case of member default.
• The market regulator said the facility will bring efficiency to the secondary market ecosystem by allowing usage of the same blocked amount towards margin and settlement obligations.
• It will result in a lower working capital requirement for members.
• Under the proposed framework, stock brokers will be allowed to either directly settle the brokerage with the UPI clients or opts for CC's facility to deduct the standard rate of brokerage from the UPI block of the clients.

6. Impact on the 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, according to 5paisa.
• The current volume mix shows that proprietary trading by market intermediaries on their own books accounts for 27 percent of cash market volumes and 50 percent of 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, the brokerage said.

7. Steps were taken by SEBI 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. 
• 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.