Block mechanism
Also written Block mechanism for early pay-in
Blocking of shares in a selling client's own demat account in favour of the clearing corporation, instead of moving them out, to give early pay-in benefit; mandatory for early pay-in since 14 November 2022.
In plain language
A client who wants to sell shares and avoid margin can give early pay-in, handing the shares over before settlement. The old way moved the shares out of the client's demat account first, and if the sale never happened, they had to be moved back.
The block mechanism avoids that round trip. The shares stay in the client's demat account but are blocked in favour of the clearing corporation. If the sale goes through, the blocked shares are transferred for pay-in. If it does not, they are simply unblocked at the end of the trading day.
Because blocked shares are as good as delivered, all margins are deemed collected and no short-margin penalty arises.
How it works
Background. SEBI introduced the block mechanism by circular dated July 16, 2021 (followed by circulars of August 18, 2022 and October 27, 2022). It became mandatory for all Early Pay-In transactions from November 14, 2022.
Steps (Chapter 5, section 5.6.2)
- The client blocks shares for sale, either himself through the depository's online system or e-DIS mandate, or through the DP using a physical DIS given by the client or a POA holder.
- Depositories pass the transfer instruction details, such as UCC, TM ID and Exchange ID, to the clearing corporation.
- The CC matches client-level net obligations with the block details and gives EPI benefit if a client-level net delivery obligation exists.
- After receiving client-level net obligations on T day, depositories match instructions against them using UCC, TM ID, CM ID and Exchange ID. The block may be kept until pay-in day; securities move only after this check.
- For unmatched orders, CCs upload a cancellation of the block on T day, so the shares are free in the client's account that day.
Restrictions
- Neither broker nor client can unblock shares once EPI benefit has been given.
- The mechanism does not apply to clients settling through SEBI-registered custodians.
Margin effect (Chapter 4, section 4.1.1.6). If securities are blocked in favour of the CC, all margins are deemed collected and no penalty for short or non-collection of margin arises.
A worked example
Quantities and prices are illustrative.
Monday. Asha holds 500 shares. Before placing a sell order she blocks 200 shares through her depository's online system in favour of the clearing corporation. She sells 200 shares at Rs 1,250, a sale value of 200 × Rs 1,250 = Rs 2,50,000.
- The depository reports the block (her UCC, her broker's TM ID, the exchange) to the CC.
- The CC finds a client-level net delivery obligation of 200 shares and gives EPI benefit. Her broker collects no margin on the sale, and no short-margin penalty can arise.
- The 200 shares stay blocked until pay-in and then move out after matching. Neither Asha nor the broker can unblock them now.
Wednesday. Asha blocks another 100 shares and places a sell order at Rs 1,300, but it does not execute.
- The CC uploads a cancellation of the block on the same day.
- The 100 shares are free in her demat account on Wednesday itself. They never left it.
Why NISM asks about it
Chapter 4, section 4.1.1.6 (Provision of early pay-in) covers the July 16, 2021 introduction, the November 14, 2022 mandate and the margin effect. Chapter 5, section 5.6.2 gives the step-by-step process and restrictions, and Chapter 6 (section 6.4) refers back to it for securities settlement. Chapter 3 (section 3.4.3) mentions sellers delivering "via earmarking/block mechanism". Expect questions on dates, on the custodian exception and on what happens to unexecuted blocks.
Common exam traps
- Shares stay in the client's demat account, blocked in favour of the clearing corporation, not the broker.
- Unexecuted: unblocked on T day itself.
- Mandatory for all early pay-in from November 14, 2022; introduced by the July 16, 2021 circular.
- Custodial clients are excluded.
- Once EPI benefit is given, no unblocking by broker or client.
- Blocked in favour of the CC = all margins deemed collected.
- Block mechanism (securities) is not the UPI block facility (funds).
Check yourself
1.Under the block mechanism, what happens to blocked shares if the sale transaction is not executed?
- a)They are transferred to the broker's pool account and returned on T+1
- b)They remain in the client's demat account and are unblocked at the end of the T day
- c)They are held by the clearing corporation until the next settlement
- d)They are automatically sold in the auction market
Show the answer
Answer: (b) They remain in the client's demat account and are unblocked at the end of the T day
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 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.
That is the whole point of the reform: thus, this 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. Under the old system the shares physically moved out and back; now they never leave.
And unmatched orders are released the same day: 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.
How the block is placed: the securities lying in client's demat account will be blocked either by client himself using depository's online system or e-DIS mandate or through depository participant based on physical DIS given by client or Power of Attorney holder.
Once EPI benefit is given, the block is firm: broker or client shall not be allowed to unblock securities if EPI benefit is provided by CC to client for the same.
Scope: the facility of block mechanism shall be mandatory for all Early Pay-In transactions, and shall not be applicable to clients having arrangements with custodians registered with SEBI.
2.Which statement about the scope of the block mechanism for sale transactions is correct?
- a)It is optional for early pay-in transactions
- b)It is mandatory for all Early Pay-In transactions, but does not apply to clients with arrangements with SEBI-registered custodians for clearing and settlement
- c)It applies to all clients, including those settling through custodians
- d)It applies only to sales made through the block deal window
Show the answer
Answer: (b) It is mandatory for all Early Pay-In transactions, but does not apply to clients with arrangements with SEBI-registered custodians for clearing and settlement
The workbook: “The facility of block mechanism shall be mandatory for all Early Pay-In transactions.” And “The block mechanism shall not be applicable to clients having arrangements with custodians registered with SEBI for clearing and settlement of trades.”
Its purpose: it “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.”
Why the others are wrong:
- Optional — it is mandatory for EPI.
- Includes custodian clients — they are excluded, as they are from direct pay-out and pay-in validation.
- Block deal window — “block” here means blocking shares in the demat account, not the block deal trading window.
3.Under the optional T+0 settlement cycle, the trading session runs from:
- a)09:00 AM to 3:30 PM with a pre-open session
- b)09:15 AM to 1:30 PM as one continuous session
- c)09:15 AM to 3:30 PM as one continuous session
- d)10:00 AM to 2:00 PM with periodic call auctions
Show the answer
Answer: (b) 09:15 AM to 1:30 PM as one continuous session
Trade Timings: One continuous trading session from 09:15 AM to 1:30 PM.
And the sessions that do not apply: Pre-Open, Special Pre-Open, Auction, Periodic call auction and post close session are not applicable under T+0 settlement, which rules out options A and D.
The other T+0 specifications worth knowing:
Price Band: the price in the T+0 segment will operate with a price band of +100 basis points from the price in the regular T+1 market. This band will be re-calibrated after every 50 basis points movement in the underlying T+1 market.
Netting of Obligations: there shall be no netting in pay-in and pay-out obligations between T+1 and T+0 settlement cycle.
Pay-in of securities shall only be in the form of early pay-in by way of block mechanism.
Auction shall not be conducted in case of securities shortage. Security shortages shall be directly closed out at 10% above the highest price of the day across all exchanges for T+0 market.
For non-custodial transactions pay-in timing is around 1:45 pm.
Where this is taught
- Series VI · Chapter 8: Functions of DP- Trading and Settlementintroduced here
- Series VII · Chapter 5: Clearing Processintroduced here
Related terms
- Demat Debit and Pledge InstructionA limited, optional authorisation letting the broker (or broker-DP) debit a client's demat account only for settlement delivery, margin pledges, exchange MF orders and open-offer tenders - in place of a PoA.
- Pay-inThe leg of settlement in which clearing members hand over what they owe: funds into the clearing corporation through the clearing bank, and securities into its pool account through the depository.
- UPI block facilitySecondary-market trading in which the client's money stays in their own bank account, blocked in favour of the clearing corporation through a UPI single-block-multiple-debit mandate.
- Power of AttorneyA legal document by which you authorise somebody else — often your stock broker or depository participant — to operate your demat and bank account on your behalf. It is optional, and revocable.
- Early pay inDelivering securities to the clearing corporation's early pay-in account ahead of the pay-in deadline, mainly to earn margin exemption; now usually done by blocking shares in the client's own demat account.
- Market transactionSettlement of a trade executed on a stock exchange, moving through a Clearing Corporation/House and the seller's and buyer's clearing member accounts — as opposed to an off-market transaction settled person-to-person.
- Tender offerThe depository-system mechanism, used for takeovers, buybacks and delisting, that blocks a shareholder's securities in favour of the Clearing Corporation once a tender-offer delivery instruction is submitted.
- Margin pledgeThe only permitted way for a client to give securities as margin — a special pledge created in the depository system that leaves the shares in the client's own demat account instead of transferring them to the broker.