scorecardresearchASBA-like facility for stock trading good for investors, a risk for brokers,

ASBA-like facility for stock trading good for investors, a risk for brokers, says HDFC Securities

Updated: 08 Apr 2023, 10:33 AM IST
TL;DR.

After SEBI's board approved ASBA-like facility for trading in the secondary market, brokerage house HDFC Securities said that it expects the regulator to gradually nudge towards mandatory adoption of ASBA for secondary trades, flushing the excess float out of the broking channel.

According to SEBI, the Applications Supported by Blocked Amount (ASBA)-like facility shall be optional for investors as well as stock brokers.

According to SEBI, the Applications Supported by Blocked Amount (ASBA)-like facility shall be optional for investors as well as stock brokers.

Market regulator Securities and Exchange Board of India's (SEBI) board approved an ASBA-like facility for trading in the secondary market for investors. Stock brokers will be able to directly settle brokerage payments with UPI clients under the proposed framework.

According to SEBI, the Applications Supported by Blocked Amount (ASBA)-like facility shall be optional for investors as well as stock brokers.

After SEBI's decision, brokerage house HDFC Securities stated that while the decision on upstreaming of client funds appears to offer a transient relief to standalone brokers (non-bank owned), it expects the SEBI to gradually nudge towards mandatory adoption of ASBA for secondary trades, flushing the excess float out of the broking channel.

"The hits to float income notwithstanding, we believe that dominant FinTech discount broking franchises have sufficient levers to offset this negative impact. Given the flat-fee model, Angel One is one of the best bets on the secular growth story in Indian capital markets and remains our high-conviction BUY. At CMP, we believe the stock is dislocated - we maintain BUY with an unchanged target price of 1,800 (15x Sep-24 EPS)," the brokerage said.

SEBI's decision

The brokerage informed SEBI’s consultation paper in early-Feb had proposed daily upstreaming of idle client funds in the form of cash to Clearing Corporation (CC), resulting in loss of float income for non-bank owned brokers. However, in its board meeting on 29th March, 2023, the SEBI allowed upstreaming of funds in the form of FD lien (or cash / MF units), in line with existing norms, implying no immediate impact on discount and traditional brokers’ float income (bank-owned brokers are immune to float), noted the brokerage.

It further pointed out that the SEBI has introduced many measures to achieve its dual objective of 1) safeguarding customers’ funds from operational risk at the broker’s end and 2) discouraging intermediaries from earning float income on client funds.

Although ASBA for secondary market trades is aimed at fulfilling both objectives, short-term operational challenges at the brokers’ end appear to have resulted in the SEBI making it optional for brokers and customers. In the long-term, HDFC Securities expects the SEBI to push for mandatory adoption of ASBA for secondary trades, posing a risk to float income for non-bank-owned brokers, it cautioned.

What is ASBA?

ASBA provides an alternative mode of payment for initial public offerings (IPOs) and follow-on public offerings (FPOs) whereby the application money remains in the investor's account till finalization of the basis of allotment in the issue.

ASBA process facilitates investors bidding with multiple options, to apply through Self Certified Syndicate Banks (SCSBs), in which the investors have bank accounts. SCSBs are those banks that satisfy the conditions laid by SEBI. SCSBs would accept the applications, verify the application, block the fund to the extent of the bid payment amount, upload the details in the web-based bidding system of NSE, unblock once the basis of allotment is finalized and transfer the amount for allotted shares, to the issuer, explains NSE.

Now that SEBI has approved this facility as an option in secondary markets, the investors would continue to earn interest on blocked funds in savings accounts till the time amount is debited. It would lead to a direct settlement with Clearing Corporation (CC), without passing through pool accounts of the intermediaries, thereby providing client-level settlement visibility to CC and thus avoiding the risk of co-mingling of clients’ funds and securities, said the market regulator.

"Such an introduction would eliminate the custody risk of investor collateral, which is presently retained by the members and not transferred to CC. It would be hassle-free. It would lead to immediate unblocking of the client’s funds and/or return/release of securities in case of member default. Under the proposed framework stock brokers will be allowed to either directly settle the brokerage with the UPI clients or opt for CC’s facility to deduct the standard rate of brokerage from the UPI block of the clients. The framework would be implemented in a phased manner to facilitate a smooth transition in the market," it explained.

Outlook

According to the brokerage's analysis, the full implementation of ASBA for secondary markets is likely to adversely impact Angel One’s earnings by 20 percent. However, it believes that stronger FinTech discount brokers have levers to offset the loss of float income through a combination of 1) the introduction of a delivery fee; 2) higher intra-day and F&O trading charges; and 3) large volume-led discounts from payment gateways.

The loss of float income from upstreaming client funds could nudge discount brokers into re-working their economics and considering a price hike, it added.

 

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First Published: 08 Apr 2023, 10:33 AM IST