From August 1, 2021, the market regulator Securities and Exchange Board of India (SEBI) will implement a block mechanism in Demat accounts of clients doing sale transactions. The time it takes to return securities to a client's Demat account will be shortened thanks to the block method.
The Securities Exchange Board of India (SEBI) has agreed to provide a 'Block Mechanism' in the Demat account of clients doing sale transactions, following extensive consultation with Depositories, Clearing Corporations (CC), and Stock Exchanges.
What is Block Mechanism?
To summarise SEBI's 'Block Mechanism,' shares will be blocked in the customer's Demat account in favour of Clearing Corporation when the client wishes to perform a sale transaction. However, if the sell transaction is not completed, shares in the client's Demat account will stay frozen until the end of the T day. The system would eliminate the movement of shares from the client's Demat account to the client's Demat account for early pay-in and back to the client's Demat account if the trade is not completed.
Furthermore, according to SEBI, if securities for sale are blocked in the depository system in favor of a clearing firm, all margins are presumed to have been collected, and penalties for short or non-collection of margins, including additional margins, are not incurred.
The 'Block Mechanism' process has been detailed by SEBI, "Clients give early pay-in (EPI) for sale trades which are yet to be executed. If the sale trade is executed, then the securities get adjusted against EPI, however, if securities remain unsold, then the securities are required to be returned to the client's Demat account, which takes time and involves cost, it said.
Clients will be able to use the Block Mechanism capability starting August 1.
Importantly, if a client receives EPI advantage from CC, the broker or client will not be able to unlock shares.
SEBI further stated that when a customer wants to block stocks for a sale transaction, the shares will be banned in favour of CC. If securities are blocked in favour of CC, all margins are considered collected, and penalties for short/non-collection of margins, including other margins, are avoided. Also, blocking will be done on a 'time basis,' which means the block will be released if the order is not performed by the end of the T day.