The Securities and Exchange Board of India issued a circular in January 2024 regarding the facility of voluntary freezing or blocking of trading accounts by clients. The stock booking industry has evolved from the call and trade system to a completely online mode all over the world including India. Investors use their login IDs and passwords provided by the trading members to trade and access the stocks. There are generally many cases of suspicion noticed by investors but there is no mechanism to block or freeze the accounts by the trading members.
A trading account is an essential component of an investor’s financial toolkit, serving as an investment account specifically designed for buying and selling securities. In the context of the stock market, the process typically begins with the opening of a demat account, which facilitates the holding and management of securities in electronic form. Subsequently, the investor proceeds to open a trading account, which serves as a gateway to the stock market, enabling the buying and selling of shares within the domestic market.
Operated through a stock broking firm, the trading account grants investors access to the trading platform of a stock exchange. This access empowers investors to execute trades, such as buying or selling shares, on behalf of the account holder. Importantly, the trading account functions as an intermediary between the demat account, where securities are held electronically, and the bank account, facilitating the seamless transfer of funds required for trading activities.
SEBI’s Proposal
In a proactive move, SEBI has mandated stock brokerages to develop and implement a framework for a voluntary freezing/blocking feature, slated for completion by April 1, 2024, with implementation scheduled for July 1, 2024. This directive involves collaboration with the Brokers’ Industry Standards Forum (ISF) to formulate comprehensive procedures. These procedures will enable clients to request account freezing from trading members, ensuring transparency and accountability in the process.
The evolution of India’s stock broking industry towards online trading has necessitated enhanced security measures. Despite this transition, many trading members lack account freezing/blocking facilities, exposing investors to potential risks from suspicious activities. In response, SEBI proposes extending the existing facility for voluntary blocking or freezing, already available for demat accounts, to trading accounts. This initiative aims to empower investors with greater control over their trading accounts, enabling them to proactively address irregularities or suspicious activities.
Furthermore, SEBI’s directive emphasises the importance of monitoring clients’ funds held with stock brokers. This directive seeks to ensure that the total available funds, including cash and cash equivalents with the stockbroker and clearing corporations or clearing members, always exceed clients’ funds as per the ledger balance. Such measures are essential to address inefficiencies and enhance investor protection.
Stock exchanges are advised to take necessary steps to implement these guidelines, including amending relevant bye-laws, rules, and regulations. Additionally, they must disseminate information about these changes to trading members and on their respective websites. This circular, issued under the powers conferred by the Securities and Exchange Board of India Act, 1992, aims to safeguard the interests of investors in securities and promote the development and regulation of the securities markets.
Need for Such Measures
While, the majority of trading members lack the capability to freeze or block accounts in response to such occurrences. SEBI has emphasised the urgent need to implement a facility for blocking or freezing trading accounts in response to suspicious activities. This indicates the pressing nature of the issue and the necessity for prompt action:
Observation of suspicious activities SEBI has noted instances where investors have detected suspicious activities in their trading accounts, emphasising the importance of providing safety assurances to traders and investors in the predominantly online stock broking industry.
Urgency in implementation Given the numerous instances where investors raise concerns regarding suspicious activities, there is an urgent need to address the situation by providing a facility to block trading accounts, akin to the blocking of ATM cards and credit cards.
Extension of existing facility SEBI recognises the existing facility for investors to voluntarily block or freeze demat accounts and proposes extending this to their trading accounts. This move aligns with the need to provide consistent security measures across different financial instruments.
Enhancing ease of doing business By proposing the facility for voluntary blocking or freezing of trading accounts, SEBI aims to improve the ease of doing business and investment in the stock market. This initiative seeks to streamline processes and enhance investor confidence in the market.
Empowering clients It is crucial to ensure that clients feel empowered as the ultimate decision-makers and risk-takers in their investment activities. Providing them with the ability to freeze or reopen trading accounts enables them to exercise greater control over their investments and respond promptly to any detected irregularities.
The measures and mechanisms proposed by SEBI are to reduce suspicious activities, and unlawful trade and improve ease of trading and investment. It is a good initiative by SEBI to prevent suspicious activities. Not only that, the availability of unblocking the accounts when necessary, protection of client’s data and their equity is also important to undo any possible errors and avoid losses. Such a measure would hinder unlawful trades as well as protect their privacy.
The framework will create methods for clients to request freezing accounts to trade members, issue a receipt of the request, time period to process the request, action was taken for the request of blocking, and the process to unblock the accounts if and when needed for the client to trade. SEBI also proposed to monitor clients’ funds and asked the stock exchanges to bring forward a mechanism to monitor client’s funds with the stock brokers.
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