Securities and Exchange Board of India has issued a circular[1] regarding the block Mechanism in the DEMAT account of clients undertaking sales transactions. SEBI had previously issued a clarification concerning the collection and reporting of margins by trading members clearing members in the cash segment on September 15th, 2020[2]. It was clarified that all Margins would be deemed to have Been collected and the penalty for short or non-collection off margin including other margins shall not rise if early pay-in of securities has been made to the clearing corporation.

If the client intends to make a sale transaction and gives early pay in for sale trade which has not been executed yet when the trade is executed then securities will get adjusted in the early pay in, in case The securities remain unsold then it is returned to clients DEMAT account which will take time and involve cost.

After the consultation with the depository, clearing corporations, and Stock Exchange the Securities and Exchange Board of India came up with the mechanism of block in the DEMAT account of clients undertaking sales transactions. while making the transaction the shares of the client will be blocked in the DEMAT account in favor of clearing the corporation and in case the sale is not executed then the share will continue to remain in the DEMAT account end at the end of the T Day. The Block mechanism will deal with the movements of shares from the DEMAT account for EPI and will Return to the DEMAT account of the client if the trade is not executed.

The circular provides for process flow for the blocking mechanism.  It states that Securities in the DEMAT account can be blocked by the client Himself who's using deposited is the online system or electronic Delivery Instruction Slip or through depository participant based on physical Delivery Instruction Slip given by client or power of attorney holder. The securities remain Indian add account for Intra or inter depositary transfer instruction till the pay-in day. After checking against the client level net delivery obligation received from CCs the block securities will be transferred. The details of transfer instruction will be provided through UCC, TM ID karma exchange ID, etc. to succeed for clients to avail EPI benefits from the depositories. Clearing corporation Will match the client level net obligation with the details of the Blocking mechanism and will provide EPI benefit to clients.

The circular provides instruction for matched orders, unblocking securities, and margining of trades. In case of matched orders, the securities will be debited from the DEMAT account and will be credited to the linked account of the TM pool till the pay-in day, which will be further transferred to the CM Pool account. The securities cannot be transferred from the PM Pool account to any other pool account other than the CM Pool account which is mapped to the team account. Any other pool to pool transfers will not be permitted except PM Pool to CM Pool. Into settlement from TM Pool to CM Pool account is also not permitted. The securities lying in the Pool account will be delivered in the settlement process on the pay-in date near the end in case of unblocking of securities after receiving the flying to level net obligation on T Day from clearing corporations, inter or intra-depositary transfer instructions details will be matched by the deposit trees with clearing corporation obligation details based on exchange ID, TM ID, CM ID, UCC, etc. If there is unmatched order, then cancellation off block instructions will be uploaded on tea day show the securities will be unlocked and will become free in the DEMAT account of the client on the same day. The cancellation of block instruction will be uploaded by the clearing corporation. If EPI benefit is provided by a clearing corporation to the client, then the broker or client will not be allowed to unblock securities.  In case the client wants to block the securities for sale transaction, it will remain blocked in the favour of clearing corporation. Blocking is time basis so the block will be released if the order is not executed by the end of the day.

The circular states that the blocking mechanism is optional and the early pay-in mechanism will continue too. it is advised to the depositories to make the facility of block mechanism available by 1st August 2021 and Provide guidance for the same. Clearing corporations and depositories need to put the appropriate system to make available block mechanisms for clients in the securities market. Section 11(1) of the Securities and Exchange Board of India act, 1992 and section 19 of the depositories act, 1996 confer the power to issue a circular to protect the interest of investors in securities, promote development, and regulate the securities market.

[1] SEBI/HO/MIRSD/DOP/P/CIR/2021/59

[2] SEBI/HO/MIRSD/DOP/CIR/P/2020/73

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