Section 194N Exemption for Foreign Representations: Key Highlights of the New Income-Tax Notification

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  On 28th November 2024 , the Ministry of Finance issued Notification No. 123/2024 , bringing clarity to the applicability of Section 194N of the Income-tax Act, 1961. The notification exempts specified foreign representations from the provisions of this section, reinforcing India's commitment to international diplomatic norms and global cooperation. Effective from 1st December 2024 , this move comes after due consultation with the Reserve Bank of India (RBI) and aligns with international protocols such as the Vienna Convention and the United Nations Privileges and Immunities Act . Understanding Section 194N of the Income-tax Act Section 194N mandates tax deduction at source (TDS) on cash withdrawals exceeding ₹1 crore in a financial year . The provision applies to withdrawals from banks, co-operative banks, and post offices, aiming to curb cash usage and promote digital transactions. Fifth Proviso to Section 194N The fifth proviso grants the Central Government the authority ...
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SEBI’s New Circular on Blocked Amount Trading: Key Changes to Strengthen Investor Protection in Secondary Market Trading

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 On November 11, 2024, SEBI (the Securities and Exchange Board of India) issued a circular to redefine secondary market trading processes, focusing on protecting investors from defaults by trading members (TMs) and clearing members (CMs). With the new guidelines set to take effect on February 1, 2025, this circular mandates changes in how trades are supported through blocked amounts in bank accounts, offering two key mechanisms: UPI block and 3-in-1 trading accounts. This blog provides an in-depth analysis of SEBI’s circular, exploring the new protocols for brokers, clearing corporations, and investors.

Understanding SEBI’s Focus on Investor Protection

SEBI’s commitment to investor protection in the financial markets is a continuous process. The latest circular stems from SEBI’s efforts to safeguard investors’ funds in the secondary market, particularly in cases where trading members may default. By introducing mechanisms to block funds in investors' bank accounts, SEBI aims to reduce risks, ensuring that investors’ funds and securities remain secure until trades are executed and settled.

What is Blocked Amount Trading?

Blocked amount trading is a system where funds in an investor’s bank account are temporarily blocked when a buy order is placed. Rather than transferring the funds to the trading member (TM) upfront, this method keeps the funds in the investor's bank account until the trade is executed. Once the order is either executed or cancelled, the funds are unblocked.

This facility offers two main benefits:

  1. Enhanced Investor Control: Investors maintain control over their funds until the trade settles.
  2. Reduced Risk of Default: Funds are protected from potential TM or CM defaults, significantly reducing risks in the secondary market.

Key Highlights of SEBI’s Circular on Blocked Amount Trading

1. UPI Block Mechanism

Introduced as a non-mandatory option in January 2024, the UPI block mechanism enables investors to block funds in their bank accounts when placing buy orders. This system was initially optional for brokers but has seen increased attention for its potential to enhance investor control and security.

2. 3-in-1 Trading Accounts

For brokers who offer 3-in-1 trading accounts, this facility seamlessly integrates trading, demat, and bank accounts. This system blocks funds or securities in the investor's bank or demat account upon order placement:

  • Buy Orders: Funds are blocked in the investor’s bank account.
  • Sell Orders: Securities are blocked in the demat account.

The 3-in-1 account further improves investor security by ensuring that funds are only transferred post-market hours, allowing investors to earn interest on blocked amounts until the actual transfer.

3. Mandatory Facility Provision by Qualified Stock Brokers (QSBs)

The circular mandates Qualified Stock Brokers (QSBs) to offer either the UPI block mechanism or 3-in-1 trading accounts to their clients. This step is expected to encourage broader adoption of blocked amount trading, providing investors with the flexibility to choose a model that aligns with their risk tolerance and trading preferences.

Detailed Provisions in SEBI’s Circular

Scope and Applicability

The circular applies to all recognized stock exchanges, clearing corporations, depositories, and the National Payment Corporation of India (NPCI). It mandates necessary changes to systems and processes to facilitate blocked amount trading, effective from February 1, 2025.

Key Requirements for Brokers and Market Participants

  • QSB Compliance: QSBs are required to offer blocked amount trading options, giving clients the choice between transferring funds to TMs or utilizing one of the new mechanisms.
  • System Updates: All exchanges, clearing corporations, and depositories are required to amend their by-laws and rules to align with the new guidelines.
  • Client Notification: Market participants, including QSBs, are advised to inform clients about the new provisions and ensure adequate dissemination of information through their websites and other communication channels.

Transition Timeline

These provisions will be operational from February 1, 2025. This lead time provides brokers and clearing corporations with sufficient time to align their systems and processes with SEBI’s requirements, ensuring a smooth transition.

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