Voluntary freezing of trading accounts: How will SEBI’s new norms safeguard investors?

Currently, SEBI has provided investors with the facility of voluntary blocking or freezing their demat accounts,  which allow investors to hold their financial instruments in an electronic form, but not their trading accounts, which actually carry out trades in the stock market (more on this later).

Why does SEBI want to introduce the facility?

The stock broking industry in India has moved from a call and trade type of scenario to largely being online, wherein investors use the login IDs and passwords provided to them by the trading members. A trading member is a stock broker of a stock exchange and registered with SEBI. The member has rights to trade on their account as well as on their clients’ account, but they cannot clear and settle these trades.

The markets regulator said that it has been observed that at times, suspicious activities are noticed by investors, but the facility of freezing/blocking of accounts is not available with the majority of trading members.

“Many a times, investors raise issues of suspicious activities in their trading accounts and thus, there is an urgent need to address the situation of having a facility for blocking of trading accounts as it is available for blocking of ATM cards and credit cards,” SEBI said.

The new facility will protect investors from any possible fraud in their trading accounts.

What do the guidelines entail?

SEBI said the guidelines will have a detailed policy for voluntary freezing or blocking the online access of the trading account of the client. It will include modes through which a client can request the trading member to voluntarily block their trading accounts and the time period within which the request shall be processed and the trading account shall be frozen/blocked.

The guideline will also talk about the action a trading member has to take upon receipt of a request for freezing of trading account and the process for re-enabling the client for trading.

What is the timeline for implementation?

SEBI has asked stock exchanges to ensure that the guidelines issued on voluntary freezing of trading accounts by clients are implemented by trading members with effect from July 1, 2024. The regulator said stock exchanges will put in place an appropriate reporting requirement by trading members to enforce the system and a compliance report on this should be submitted to SEBI by stock exchanges by August 31, 2024.

What is a trading account?

A trading account is an investment account which helps retail investors to buy or sell securities. While trading in the stock market, the first step is opening of a demat account and the second is opening of a trading account which enables investors to buy and sell shares in the domestic market.

Trading account is opened with a stock broking firm which, in turn, provides access to the trading platform of a stock exchange, and allows the execution of trades on behalf of the account holder. It works as a link between the demat account and the bank account.