Sebi Explains: What is block mechanism facility pertaining to demat accounts?

Capital markets regulator Sebi on Thursday said block mechanism facility pertaining to demat accounts will not be applicable for clients having arrangements with custodians for clearing and settling trades.

In order to safeguard investors' demat accounts, the Securities and Board of India (Sebi) in August said the facility of block mechanism will be mandatory for all early pay-in transactions from November 14.

Currently, the facility is optional for investors.

The early pay-in mechanism is used by traders to reduce their margin obligations.

Under the block mechanism, shares of a client intending to make a sale transaction will be blocked in the client's demat account in favour of the clearing corporation concerned.

"In view of the representations received from depositories and custodians, it is clarified that the block mechanism shall not be applicable to clients having arrangements with custodians registered with Sebi for clearing and settlement of trades," the regulator said in a circular.

Sebi asked depositories and clearing corporations to put in place an appropriate system to ensure compliance with the new rules.

In July, the regulator decided to introduce the concept of a block mechanism, whereby investors have an option to block securities in their respective demat accounts for sale transactions from August 1.

The option of an early pay-in method is also available.

Under this option, shares are transferred from a client's demat account to the clearing corporation concerned's account. If the sale transaction is not executed under the early pay-in mechanism, then those shares are returned to the client's account and the process takes time and involves a cost.

In case the sale transaction is not executed, shares will continue to remain in the client's demat account and will be unblocked at the end of the T (Trade) day. Blocking of shares will be on a 'time basis'.