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Block Mechanism in DEMAT account of Client: SEBI Clarification

Nikhil Mogha

| Updated: Nov 02, 2022 | Category: SEBI

Block Mechanism

The SEBI vide circular “CIR/HO/MIRSD/DOP/P/CIR/2022/595” dated 16th July 2022 has introduced a block mechanism in the DEMAT account of the clients who are undertaking sale transactions. The concept was introduced to ease the clearing corporation’s operations of the Early Pay-in mechanism and the process of movement of shares back to the client’s DEMAT account in case the trade is not executed. The SEBI has further, vide circular dated 18th August 2022, issued a clarification on the block mechanism[1] and states that the facility of the block mechanism shall be mandatorily applied to all the Early Pay-in transactions. Henceforth, because of the representations received from the depositories and custodians, the SEBI has, vide Circular “SEBI/HO/MIRSD/DoP/P/CIR/2022/143” dated 27th October 2022, issued further clarifications on the said matter which is discussed below in the article.

What are Early Pay-in Transactions?

An early pay-in transaction is a transaction wherein the settlement obligations (funds or Securities) to the exchange are fulfilled earlier than the designated due date for settlement. In other words, the securities are delivered before time, and early pay-in of funds takes place when the total purchase amount of the transaction is deposited before time. In early pay-in transactions, the margins are generally levied lesser for the trades that are to be taken on the exchange.

For example: If a trader sells shares worth Rs 20,000, in that case, the trader will not get benefited from the whole amount. It happens because the margins are blocked till the securities have been delivered. Hence, if the margin is at 25%, then Rs 15,000 will be available to the trader till the settlement is completed. However, this can be avoided if the stock broker opts for an early pay-in mechanism. In this mechanism, the securities are debited from the trader’s account on the selling date itself. By delivering the securities early, the trader gets access to the entire amount of Rs 20,000 as soon as the sale transaction is done.

What is Block Mechanism?

A block mechanism is a process wherein the shares are blocked in the DEMAT account of the clients who intend to make sales transactions in favour of the concerned clearing corporation.

The process flow for the Block Mechanism are:

  • In this mechanism, the securities lying in the client’s DEMAT account will be blocked either by the client himself through Depository’s online system or eDIS mandate or by the depository participant based on physical DIS.
  • The depository participant will furtherthen keep a block on the client’s DEMAT account regarding the Intra or inter-depository transfer until the pay-in day.
  • The securities that the depository participant blocks will get transferred only after checking the client’s level net delivery obligation received from the clearing corporation.
  • The depositories will further provide the details of the transfer instructions to clearing corporations.
  • The clearing corporations will then match the client-level net obligations with the block details and, on satisfaction, will provide EPI benefits to the client.

What are the changes bought up in the circular?

It was clarified by SEBI through circular “SEBI/HO/MIRSD/DoP/P/CIR/2022/109” dated 18th August 2022 that the block mechanism shall mandatorily be applicable forall Early Pay-in transactions. However, after consultation and representations from the depositories and custodians, it is decided that the block mechanism shall not apply to clients who have an arrangement with SEBI-registered custodians for clearing and settlement of the trade.

What are the other directions bought up in the circular?

The directions that are issued for the depositories, clearing corporations and stock exchanges are:

  1. Depositories and Clearing Corporation: The depositories and corporations must put in place a system that will ensure proper compliance with the provisions of this circular.
  2. Stock Exchanges and Depositories: The stock exchanges and depositories are required to:
    • Bring the provision of this circular to the notice of the members or participants.
    • Post the circular on the website.
    • Make amendments to the bye-laws, rules and regulations for the implementation of the provision of this circular.
    • Submit monthly development reports to SEBI signifying the status of implementation of the provisions of the circular on 15thNovember 2022.

Conclusion

The SEBI has provided the stockbroker with the advantage of fully utilising the sale transactions through the Early Pay-in mechanism. The early pay-in transactions enable the stock broker to utilise the whole transaction and avoid the margin by settling the transactions before the due date. Further, to allow this mechanism in other transactions, the SEBI has introduced a block mechanism for all early pay-in transactions. However, the SEBI, through this circular, has clearly stated its intention that the block mechanism shall not apply to those clients who have arrangements with the SEBI registered custodians for clearing and settlement of the trade.

Read our Article: SEBI Clarification on Execution of DEMAT Debit and Pledge Instructions

Nikhil Mogha

An Advocate by profession, Nikhil Mogha holds experience in the field of Business and Securities law. He has done his Masters of Law in Corporate Law from Guru Gobind Singh Indraprastha University, New Delhi. He is also versed with the drafting and research work in the field of Company Law, Banking Laws and Contract Laws.

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