Block Mechanism for Sale Transactions — How Early Pay-In Now Works Without Share Movement

SEBI's block mechanism for sale transactions eliminates the need to move shares from the client's demat account for early pay-in. When the client intends to make a sale transaction, shares will be blocked in the demat account of the client in favour of Clearing Corporation. If the sale transaction is not executed, shares shall continue to remain in the client's demat account and will be unblocked at the end of the T day. This article explains how the block mechanism works and the process flow for matched and unmatched orders.

The Problem Before Block Mechanism

Previously, for early pay-in (EPI), shares had to be moved from the client's demat account to the broker's pool account and then back to the client's demat account if the trade was not executed. This movement created:

• Operational inefficiencies.
• Risk of misuse of client securities.
• Unnecessary movement of shares.

The Block Mechanism Solution

The block mechanism will do away with the movement of shares from client's demat account for early pay-in and back to client's demat account if trade is not executed.

How the Block is Created

The securities lying in client's demat account will be blocked either by:

• Client himself using depository's online system.
• eDIS mandate.
• Through depository participant based on physical DIS given by client.
• Power of Attorney (POA) holder.

Key Benefits

• No Share Movement: Shares remain in the client's demat account.
• Margin Benefit: If securities are blocked in favour of CC, all margins would deemed to have been collected and penalty for short/non collection of margin shall not arise.
• EPI Benefit: Clients can avail early pay-in benefit without actual movement of shares.

Process Flow for Block Mechanism

Step 1: Blocking of Securities

• The securities lying in client's demat account will be blocked either by client himself using depository's online system or eDIS mandate or through depository participant based on physical DIS given by client or Power of Attorney (POA) holder.

• Depositories may keep block on the securities in client's demat account in respect of Intra or Inter depository transfer instruction till pay-in day.

Step 2: Validation Against Obligations

• The blocked securities will be transferred only after checking against the client level net delivery obligation received from CCs.

• Depositories will provide the details of transfer instructions viz., UCC, TM ID, Exchange ID etc. to CCs for clients to avail EPI benefit.

• CC will match the client level net obligations with the Block details provided by depositories and CC will provide EPI benefit to client if the client level net obligation exists for that client.

Step 3: Matched Orders

• In case of matched orders, block securities will be debited from Client's demat account and will be credited to linked TM Pool account upto pay-in day.

• TM shall further transfer such securities to CM Pool account.

• Securities lying in CM pool account will be delivered in settlement process on the Pay-in date.

Step 4: Unmatched Orders

• In case of unmatched orders, CCs shall upload cancellation of Block instruction on T day so that securities are unblocked and become free in client's demat account on T day itself.

Step 5: Unblocking of Securities

• After receiving client level net obligations on T day from CCs, depositories will match the Intra or Inter depository transfer instruction details with CC obligation details based on UCC, TM ID, CM ID, Exchange ID, etc.

• ln case of unmatched orders, CCs shall upload cancellation of Block instruction on T day so that securities are unblocked and become free in client's demat account on T day itself.

Blocking on Time Basis

Blocking shall be on 'time basis' and would mean if the order is not executed by the end of the T day, the block shall be released.

Applicability

• The facility of block mechanism shall be mandatory for all Early Pay-In transactions.

• The block mechanism shall not be applicable to clients having arrangements with custodians registered with SEBI for clearing and settlement of trades.

How We Help

At Anuj Desai & Associates, we help stock brokers implement the block mechanism for sale transactions, ensure compliance with SEBI's requirements, and integrate the process with their trading systems. If you need assistance with block mechanism compliance, reach out to our regulatory compliance desk.