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About One-Hour Settlement of Trades

Context:

SEBI plans to introduce One-Hour Settlement of trades by March 2024 to improve trade settlement efficiency. Additionally, they will introduce an Application Supported by Blocked Amount (ASBA)-like facility for Secondary Market trading by January 2024.

Relevance:

GS III: Indian Economy

Dimensions of the Article:

  1. Application Supported by Blocked Amount (ASBA)
  2. Trade Settlement
  3. SEBI’s Groundbreaking Real-Time Trade Settlement Plan
  4. Benefits of One-Hour Trade Settlement

Application Supported by Blocked Amount (ASBA):

ASBA is a system introduced by SEBI to simplify the application and allotment process for various securities offerings, including IPOs and rights issues.

  • Efficiency and Investor-Friendly: ASBA aims to streamline and enhance the application process, making it more efficient and user-friendly for investors.
  • Deferred Payment: With ASBA, investors don’t need to transfer the full application amount upfront; the amount is only debited once shares are allotted.

Trade Settlement:

  • Trade Settlement Essence: Trade settlement is a pivotal procedure within financial markets facilitating the transfer of funds and securities between trading parties.
  • Finalizing Transactions: This process ensures the completion of transactions in securities trading, guaranteeing that buyers obtain the securities they’ve purchased, while sellers receive the agreed-upon funds.
T+1 Settlement Cycle Unveiled:
  • Introduction in January 2023: India embraced the T+1 settlement cycle at the beginning of 2023, where “T” signifies the trade date.
  • One Business Day Settlement: Under this system, trade settlements occur swiftly, within a single business day or 24 hours from the actual trade.
  • India’s Second Implementation: India followed China as the second country to institute the T+1 settlement cycle, initially in top-listed securities.
  • Favorable Outcomes: This transition delivered various benefits, encompassing heightened operational efficiency, accelerated fund transfers, prompt share delivery, and enhanced convenience for stock market participants.

SEBI’s Groundbreaking Real-Time Trade Settlement Plan:

One-Hour Trade Settlement:
  • Swift Settlement Scheme: This pioneering initiative aims to complete trade settlement processes at an unprecedented pace.
  • Seller’s Benefit: When an investor sells a share, the sale proceeds will be promptly credited to their account within a mere one-hour timeframe.
  • Buyer’s Acquisition: Simultaneously, buyers will have the purchased shares transferred into their demat accounts within the same rapid one-hour interval.
  • Remarkable Time Reduction: This marks a substantial reduction in settlement duration compared to the existing T+1 cycle.
Instantaneous Trade Settlement:
  • Acknowledgment of Complexity: SEBI recognizes that achieving instantaneous settlement is a more complex endeavor, necessitating additional technological advancements.
  • Stepwise Approach: Consequently, SEBI plans to first implement the one-hour trade settlement system and subsequently progress towards achieving instantaneous settlement.
  • Targeted Timeline: The envisioned timeframe for the launch of instantaneous settlement is set to be realized by the conclusion of 2024.

Benefits of One-Hour Trade Settlement:

  • Expedited Access: Investors will encounter substantially shortened settlement durations, allowing for more rapid access to both funds and securities.
  • Enhanced Liquidity: The expedited settlement process can contribute to improved market liquidity. With funds becoming available for reinvestment at a faster pace, the market can experience heightened trading activity.
  • Risk Mitigation: The reduction in settlement time plays a pivotal role in mitigating counterparty and market risks. By accelerating the transfer of funds and securities, it bolsters overall market stability.
  • User-Friendly Experience: Investors will benefit from the accelerated access to their funds and securities, creating a more user-friendly and efficient trading environment.

-Source: The Hindu


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