The Securities and Exchange Board of India (SEBI) has put forth a proposal to introduce a facility for clearing and settlement of funds and securities on T+0 (same day), providing an optional instant settlement cycle. This initiative aims to complement the existing T+1 settlement cycle in the secondary markets for the equity cash segment.
GS III: Indian Economy
Dimensions of the Article:
- SEBI’s Proposal: Advancing Settlement Cycles
- Benefits of Instant Settlement Mechanism
- T+1 Settlement Cycle
SEBI’s Proposal: Advancing Settlement Cycles
Introduction of T+0 and Instant Settlement Cycle:
- SEBI proposes the introduction of a shorter settlement cycle alongside the existing T+1 cycle.
- The new cycles include T+0 settlement and an instant settlement cycle implemented in two phases.
Phase 1: T+0 Settlement Cycle:
- Optional T+0 settlement cycle for trades until 1:30 PM.
- Settlement of funds and securities on the same day by 4:30 PM.
Phase 2: Instant Settlement Cycle:
- Optional immediate trade-by-trade settlement (funds and securities).
- Trading permitted until 3:30 PM in this phase.
Rationale for Shorter Settlement Cycle:
- Increased growth in Indian securities markets necessitates more efficient and secure measures.
- Focus on enhancing market efficiency, particularly for retail participants.
- Leverage the widespread adoption of UPI and instant payment platforms for equity transactions.
- Address investor preferences for reliable, low-cost, and high-speed transactions in the current market landscape.
Benefits of Instant Settlement Mechanism
- Immediate Receipt of Funds and Securities:
- Enables instant receipt of funds and securities compared to the current T+1 settlement.
- Elimination of Settlement Shortages:
- Mitigates the risk of settlement shortages by requiring availability of both funds and securities before placing an order.
- Improved Market Liquidity:
- Faster settlement enhances market liquidity as investors gain quicker access to their funds after selling securities.
- Reduced Margin Requirements:
- Traders may need lower margin or collateral with the assurance of rapid settlement, potentially reducing trading costs.
- Price Stability:
- Market price stability is enhanced as the security’s price is less likely to undergo significant changes between trade execution and settlement.
- Enhanced Investor Control:
- Provides investors with greater control over securities and funds, particularly for UPI clients trading through blocked amounts.
- Establishing Equities as a Superior Asset Class:
- Instant settlement contributes to positioning Indian equities as an asset class with superior features such as resilience, low cost, and efficient transaction times, surpassing emerging alternatives.
T+1 Settlement Cycle
Background: Trade Settlement
- Settlement involves the transfer of funds and securities on the settlement date, marking the completion of a trade.
Current Cycle of Trade Settlement
- SEBI has progressively shortened settlement cycles: T+5 to T+3 in 2002, and further to T+2 in 2003.
- The current settlement cycle in the Indian stock market is T+1, effective from January 2023.
- India became the second country, after China, to adopt the T+1 settlement cycle for top-listed securities.
T+1 Settlement Plan
- Under T+1, trade-related settlements must be completed within 24 hours of a transaction.
- For instance, if an investor buys shares on Wednesday, they are credited to the demat account on Thursday.
- Prompt Fund Receipt and Share Transfer:
- Investors receive money within a day of selling shares, and buyers get shares in their demat account within a day.
- Reduced Exposure to Counterparty Risk:
- Quicker settlement mitigates counterparty risk as trade obligations are fulfilled rapidly.
- Capital Efficiency:
- Shorter settlement cycles reduce the capital tied up for collateralizing risk, enhancing capital efficiency.
-Source: Indian Express