Sebi Initiates Efforts to Introduce Immediate Settlement in the Indian Stock Market.

According to the Sebi discussion document, they're considering a voluntary same-day settlement cycle (T+0) for trades until 1:30 pm in Phase 1. In this phase, both funds and securities settlement would be finalized by 4:30 pm on the same day. Phase 2 aims to introduce instant settlement for all trades conducted until 3:30 pm.

When seeking public input on the matter, the capital market regulator has clarified that the proposed shorter settlement cycles will supplement the existing T+1 cycle.

Summary

• Sebi has issued a consultation paper outlining plans for same-day settlement (T+0) and optional instant settlement in the Indian stock market.

• The proposed changes will be implemented in two phases.

• While seeking public comments, the capital market regulator emphasized that the shorter settlement cycles will work alongside the current T+1 cycle.

• According to the Sebi consultation paper, the introduction of T+0 settlement will initially apply to the top 500 listed companies based on their market capitalization.

Sebi, the Securities and Exchange Board of India, has put forward a discussion paper suggesting the introduction of same-day settlement (T+0) and optional instant settlement in two stages for the Indian stock market.

In seeking feedback from the public on this matter, the regulatory body for the capital market clarified that these proposed shorter settlement cycles would operate alongside the existing T+1 cycle.

"The Sebi discussion paper highlights the notable advancements in the country's payment systems and the sophisticated technologies employed by Markets Infrastructure Institutions (MIIs). This seems to open up opportunities to enhance clearing and settlement timelines on an optional basis," stated the paper.

"The proposal suggests introducing, as an option, a shorter settlement cycle for the equity cash segment, in addition to the existing T+1 settlement cycle," it further explained.

According to the Sebi consultation paper, Phase 1 envisions the introduction of an optional T+0 settlement cycle (applicable to trades until 1:30 pm) where the settlement of funds and securities would be completed on the same day by 4:30 pm.

In Phase 2, the subsequent step involves the optional implementation of immediate trade-by-trade settlement (for both funds and securities) for all trades, encompassing transactions conducted until 3:30 pm.

Interestingly, back in 2002, the settlement cycle was reduced from T+5 to T+3 and further shortened to T+2 in 2003. Then, in 2021, a phased introduction of T+1 settlement began, reaching full implementation in January 2023.

According to the Sebi consultation paper, the initial step involves making T+0 settlement available for the top 500 listed companies based on market capitalization. This will be implemented in three phases, starting with 200 companies, followed by another 200, and finally, the remaining 100, moving from the lowest to the highest market capitalization.

Regarding the potential benefits of T+0 or instant settlement, the regulator believes that this option is anticipated to offer flexibility by enabling quicker pay-outs of funds against securities for sellers and faster delivery of securities against funds for buyers.

Moreover, the regulatory body believes that implementing this change will not only release additional capital in the market, thereby improving overall market efficiency, but it will also enhance the risk management of clearing corporations. This is because trades will be supported by upfront funds and securities.

However, there are potential concerns to consider. Having two settlement cycles might fragment liquidity, impacting efficient price discovery and potentially increasing the impact cost. Additionally, there's the possibility of elevated trading costs, as funds and securities need to be provided upfront before placing orders.

The Sebi paper does acknowledge these concerns but suggests that they can be mitigated. It mentions that participants who can access both T+0 (or instant settlement) and T+1 markets could bridge price and liquidity gaps between the two segments.