CIRCULAR
SEBI /HO /MRD/MRD-PoD-2/P/CIR/2023/99 June 23,2023
To
All Recognized Stock Exchanges
All Recognized Clearing Corporations
All Recognized Depositories
National Payment Corporation of India
Dear Sir/ Madam,
Sub: Trading supported by Blocked Amount in Secondary Market
1. In its continuing endeavour to provide protection to the investors from the default of
member(s) [‘trading member’ (TM) / ‘clearing member’ (CM)], SEBI has decided to
introduce a supplementary process for trading in secondary market based on blocked
funds in investor’s bank account, instead of transferring them upfront to the trading
member, thereby providing enhanced protection of cash collateral. The said facility
shall be provided by integrating Reserve Bank of India (RBI) approved Unified
Payments Interface (UPI) mandate service of single-block-and-multiple-debits with
the secondary market trading and settlement process and hereinafter referred as ‘UPI
block facility’.
2. Under the proposed framework, funds shall remain in the account of client but will be
blocked in favour of the clearing corporation (‘CC’) till the expiry date of the block
mandate or till block is released by the CC, or debit of the block towards obligations
arising out of the trading activity of the client, whichever is earlier. Further, settlement
for funds and securities will be done by the CC without the need for handling of client
funds and securities by the member.
Page 1 of 10
3. Further, while a UPI block upon creation shall be considered towards collateral, the
same shall also be available for settlement purposes. For the clients who prefer to
block lump sum amount, their block can be debited multiple times, subject to available
balance, for settlement obligations across days.
4. The main features of the framework are as under:
4.1. General features:
4.1.1. Availing UPI block facility shall be at the option of the investor.
4.1.2. Shall be introduced as a non-mandatory facility to be provided by the stock
broker.
4.1.3. Since an investor is allowed to have trading accounts across multiple stock
brokers, an investor can choose to avail UPI block facility under some
broker(s) and non-UPI based trading under others. However, once opted
for UPI block facility (until they opt out after fulfilling all obligations) under
particular broker(s), the following needs to be adhered to in respect of UPI
block facility under that broker(s):
4.1.3.1. All cash collaterals shall be provided through UPI block only.
4.1.3.2. Cash equivalent collateral such as bank guarantees and fixed
deposits shall not be permitted.
4.1.3.3. Securities collateral to be provided through pledge/re-pledge system
and only those securities can be provided which are in the approved
list of CC.
4.1.3.4. Funds pay-in settlement to be done through UPI block only.
4.1.4. Collateral and settlement shall continue to be segment-wise, and the
client/TM/CM shall need to transfer/reallocate collateral between
segments.
4.1.5. Running account settlement shall not be supported. CC shall settle the
account of clients using UPI block facility on a daily basis, i.e., any pay-out
due to the client shall be paid out to the client on the settlement day.
Page 2 of 10
4.1.6. Single block limit of Rs. 5 lakhs shall apply [currently applicable for UPI
based securities market transaction]. However, multiple blocks can co-exist
subject to the overall limit applicable in UPI.
4.2. Eligibility of investors: All investors who are permitted to use RBI’s UPI facility,
and meeting the criteria defined by CCs, shall be eligible.
4.3. Process (in brief):
4.3.1. The stock brokers providing the facility shall notify the details of investors
desirous of availing the service to the stock exchange. The stock exchange
shall validate that bank and demat account maintained in the Unique Client
code (‘UCC’) systems and used for block creation and settlement. The
exchanges shall provide relevant details to the CC.
4.3.2. The block shall be created by client using the UPI application (‘UPI app’)
based on the blocking request initiated through stock broker app. While
creating the blocking request under the proposed block mechanism,
relevant information such as TM Code, CM Code, Unique Client Code,
segment etc. shall be captured by the stock broker and sent to UPI.
4.3.3. The UPI block shall get created in favour of the CC and can be debited by
the CC only.
4.3.4. The block shall support multiple debits – i.e., for a block created on day 1,
it can be partially debited multiple times till the exhaustion of amount or
expiry/release of the block, whichever is earlier.
4.3.5. Since the CC shall directly maintain/update the client collateral value based
on the blocking information received from the UPI railroads of National
Payment Corporation of India (‘NPCI’) through the CC’s sponsor bank, the
stock brokers shall not allocate any collateral for clients under the facility of
UPI block. Other procedures such as deemed allocation of proprietary
collateral, validation of 50:50 cash collateral, risk reduction mode
monitoring etc. remain unchanged.
4.3.6. The CC shall debit the UPI block created in its favor to the extent of client
level obligations, and receive the same in its account, without funds going
through the clearing bank account of the CM. Securities provided as early
Page 3 of 10
pay-in (EPI) by the clients, using the block mechanism provided by
depositories shall be received by the CC as per the prevailing process.
4.4. Settlement
4.4.1. There shall be two rounds of pay-in and one round of pay-out.
4.4.2. In Round 1 Pay-in, settlement obligation shall be calculated at client level,
individually, for the clients opting for UPI block facility. There shall be no
netting of obligations across different clients opting for UPI block facility and
the settlement obligations shall be inclusive of standard statutory levies
such as securities transaction tax (STT), stamp duty etc. The first deadline
for pay-in shall be for the UPI clients. Clients with payable funds shall
provide UPI block atleast to the extent of obligations, and clients with
deliverable securities shall ensure availability of securities to the extent of
obligations through the prevailing Early Pay-in (EPI) block mechanism
wherein the securities given as EPI are blocked in favour of CC in the
demat account of the client undertaking sale transaction. At the end of the
Round 1 pay-in deadline defined by the CCs, the clients who have not
provisioned for their pay-in shall be considered as short.
4.4.2.1. Round 2 Pay-in
4.4.2.1.1. The second round of funds obligation shall be a single net
settlement of funds obligation at CM level for (i) proprietary
account of CM/TM, (ii) clients not opting for UPI block facility and
(iii) shortages from UPI clients in Round 1 pay-in, including
shortfall of funds in lieu of securities, if any.
[Illustration for funds in lieu of securities: Consider a scenario
when a security sold for Rs. 100 was not delivered by client and
last closing price available on settlement day for the said security
was Rs. 105. In such a case, the CC shall not provide the pay-
out of Rs. 100 to the client and in addition shall debit Rs. 5 from
the block amount of the client. In case the blocked amount is
insufficient, then CC shall debit this amount to CM.]
Page 4 of 10
4.4.2.1.2. The second round of securities obligation shall be a single net
settlement at CM level for (i) proprietary account of CM/TM, and
(ii) clients not opting for UPI block facility, as per the existing
process.
4.4.2.1.3. The CMs shall be required to provide the aforementioned
funds/securities obligations to the CC.
4.4.2.1.4. If the CMs fail to fulfil the obligation, then such members shall be
treated as short and relevant provisions for shortage
handling/default management shall apply.
4.4.3. Pay-out - The pay-out shall be done in a single round after the two pay-in
rounds. The CC shall give pay-out of funds directly to the bank account of
the clients opting for UPI block facility, provided they have fulfilled their pay-
in obligations. The CCs shall provide instructions to depositories for
securities pay-out to the clients, which shall be directly delivered to client’s
account without the need of handling of such securities pay-out by TM/CM.
For all other clients and proprietary account of CM/TM, there shall be single
net settlement by CC to CM as is currently being done.
4.5. Release of block
4.5.1. Client can request for release of block to TM through TM app. TM shall
request CM, and CM shall request CC. In case the TM, CM and CC do not
have any residual claim, the CC shall release the block through UPI. Upon
release of the block, the client’s bank shall unfreeze the amount in the
account of the client. Information regarding release shall be shared by
NPCI with CC (through CC’s sponsor bank) who in-turn shall transmit it to
CM and TM. Further, since the release of the block is going to result in
collateral being unallocated in favour of the client, as per the existing
process, the CC shall send a notification to the client regarding the
collateral being removed.
4.6. Various scenarios
4.6.1. An analysis of how various scenarios i.e. (i) prefunded purchase by client,
(ii) delivery sale by client by EPI, (iii) purchase/ sale by client supported by
Page 5 of 10
margins and (iv) intraday cash market/ derivatives trading, would be
handled under the proposed UPI block facility vis-a-vis the current process
is placed as Annexure-1.
4.7. Dealing with shortages:
4.7.1. Cash Market: Funds shortage
4.7.1.1. CC shall provide pay-out of securities to the client’s demat account
and instruct the depository to auto-pledge such securities to the TM’s
“client unpaid securities pledgee account”.
4.7.1.2. CC shall maintain the shortage amount of client. The obligation shall
devolve on TM’s CM, who shall settle the same with CC.
4.7.1.3. If client provides additional block subsequently, the CC shall debit the
amount to the extent of shortfall and provide the same to the CM.
4.7.1.4. In case client fails to provide the amount, then TM can sell the
securities pledged in favour of Client Unpaid Securities Pledgee
Account (CUSPA) and/ or provided by way of margin pledge and mark
early pay-in.
4.7.1.5. Out of the funds pay-out due to the client, amount to the extent of
shortfall shall be paid to the CM who fulfilled the obligation. The
remaining funds, if any, shall be paid out to the client.
4.7.1.6. The CC shall continue to maintain and update the residual short
amount of the client, if any.
4.7.2. Cash Market: Securities shortage
4.7.2.1. Funds pay-out shall not be provided to the client. The amount shall be
withheld by CC and used towards requirement of funds in lieu of
securities delivered short.
4.7.2.2. Funds required in lieu of securities shortage in excess of funds pay-
out shall be debited from block amount of client. In case of insufficient
blocked amount, the same shall devolve on clearing member.
Page 6 of 10
[Illustration: Consider a scenario when a share sold for Rs. 100 was
not delivered and last closing price available on settlement day was
Rs. 105. In such a case, the CC shall not provide the pay-out of Rs.
100 to the client and in addition shall debit Rs. 5 from the block amount
of the client. In case the blocked amount is insufficient, then CC shall
debit this amount to CM.]
4.7.2.3. Auction shall be conducted to buy the securities short delivered by
UPI clients.
4.7.2.4. If actual amount required towards auction purchase or financial close-
out exceeds the pay-out amount referred to in para 4.7.2.2 above, the
same shall be debited from client block. In case of insufficient client
block, the same shall devolve on clearing member.
4.7.2.5. In case of any devolvement on member, the short amount of client
shall be maintained and in case any blocking is done in future, the
block shall be debited to the extent of shortfall and provided to the
clearing member.
4.7.3. Shortfall: Derivatives
4.7.3.1. CC shall debit block to the extent of pay-in requirements, irrespective
of whether such debit causes a margin shortfall. In exceptional
circumstances, if pay-in exceeds the margin, the residual amount
shall devolve on CM.
4.7.3.2. In case of margin shortfall, TM/CM can close-out the position of the
client and resultant loss shall be debited to the block or resultant profit
shall be paid out to the client by the CC. Till the time TM/CM closes-
out the position, the provisions related to deemed allocation of
proprietary collateral shall apply.
4.7.3.3. In case obligations have devolved on CM, any pay-out resulting from
close-out of positions, or any new block created by client, to the extent
of devolvement, shall be provided to the CM.
Page 7 of 10
5. Since the framework requires certain changes to be made in the systems and
processes of clearing corporations, stock exchanges, depositories, stock brokers and
NPCI, the concerned entities are expected to make requisite changes and test the
systems and processes for robustness thereafter to make the facility live by January
01, 2024.
6. To begin with, the facility may be made available in the equity cash segment. The
CCs may extend the facility to additional segments subsequently.
7. Further, detailed operational guidelines including mode of brokerage collection shall
be issued by CCs in consultation with relevant stakeholders such as stock
exchanges, depositories etc.
8. Stock Exchanges/Clearing Corporations/ Depositories are directed to:
a. take necessary steps to put in place systems for implementation of the circular,
including necessary amendments to the relevant bye-laws, rules and regulations;
b. bring the provisions of this circular to the notice of their members and also
disseminate the same on their websites; and
c. communicate to SEBI the status of implementation of the provisions of this
circular.
9. This circular is being issued in exercise of the powers conferred under Section 11(1)
of the Securities and Exchange Board of India Act, 1992, read with Section 10 of the
Securities Contracts (Regulation) Act, 1956 to protect the interests of investors in
securities and to promote the development of, and to regulate the securities market.
10. This circular is available on SEBI website at www.sebi.gov.in at “Legal→Circulars”.
Yours faithfully
(Vishal Shukla)
General Manager
Market Regulation Department
Policy and Development -2
Email: vishals@sebi.gov.in
Page 8 of 10
Annexure-1: Various Scenarios
Current process Proposed process
Scenario 1: Prefunded purchase by client
 Client transfers Rs. 150 to member.  Client creates a block of Rs. 150 in
 Member may retain the client funds favour of the CC. The amount shall get
with itself and allocate collateral to allocated as collateral.
the extent of 20% margin  The client purchases a share worth Rs.
requirements at the CC (Say Rs. 30). 100. The margin requirement is 20, this
 Client purchases a share for Rs. 100, shall get adjusted from the block (which
the margin collection requirement is is allocated as collateral).
Rs. 20 which is blocked from client’s  STT and stamp duty shall be 11 paise,
allocation. which shall be added to the client’s
 Collateral is released after the obligation. The CC shall debit 100.11
member completes the net towards settlement at the stipulated
settlement with the CC. time.
 With the successful debit from the
client, the securities receivable by the
client shall be provided in the client’s
depository account directly by the CC at
the time of settlement pay-out.
Scenario 2: Delivery sale by client by early pay-in
 Client uses block mechanism for  The client shall provide securities as
early pay-in of securities. early pay-in through the block
 Such early pay-in information is mechanism only.
received by the CC from  If the early pay-in information is
depositories. received from depository before trade
 A sell order is executed on behalf of execution, there shall be no margin. If
the client. the information is received
 If sell order is executed after early subsequently, the proprietary collateral
pay-in, then no margin is applicable of the member shall be blocked till the
at any time. receipt of early pay-in.
 If early pay-in is received subsequent  Since the client has completed the
to the sell order execution, the settlement, the CC shall pay out funds
proprietary collateral of the member directly in the client account. While
shall be blocked till receipt of early providing the funds pay-out, CC shall
pay-in. deduct the STT and stamp duty.
 While providing pay-out to the client,
the member may adjust other
Page 9 of 10
statutory dues (stamp duty, STT),
brokerage etc.
Scenario 3: Purchase/sale by client supported by margins
 Client provides 20% margin to the  The client may create only partial block
member. Client can execute trades to the extent of margin instead of entire
based on the margins on trade date. upfront value or early pay-in through
The client shall need to provide the block mechanism. The client shall need
remaining 80% amount (in case of to provide additional block or provide
purchase) or deliver the security (in early pay-in till the stipulated time.
case of sale) till the applicable Further process shall be same as
settlement deadline. discussed in Scenario 1 and Scenario
2.
Scenario 4: Intraday cash market/derivatives trading
 Client provides margin money to the  In case of losses, the CC shall debit the
member. Client carries out intraday block to the extent of losses towards
trading or trade in derivatives. There client pay-in.
are no exchange-of-value delivery  In case of gains, the pay-out shall be
obligations (funds against securities given by CC in the client account. The
or vice-versa), but only losses or CC shall not add the pay-out to the
gains. Losses shall be deducted from funds collateral of the client, and if
the margin money given by clients desired the client may create another
and gains may be added to the block.
margin money of client or paid out.
Page 10 of 10