The Securities and Exchange Board of India (Sebi) plans to implement instantaneous settlement of trades of T+O in two phases, and has floated a consultation paper, seeking comments on the same.
In phase 1, the regulator has proposed an optional T+0 settlement cycle (for trades till 1:30 pm), with settlement of funds and securities to be completed on the same day by 4:30 pm.
In phase 2, an optional immediate trade-by-trade settlement (funds and securities) may be carried out. In the second phase, trading will be carried out till 3.30 pm, the consultation paper said.
Earlier this month, Sebi chief Madhabi Puri Buch had said the market regulator is readying to bring in same-day trade settlement before the end of the current financial year.
Currently, trades in India are settled on a “T+1” basis. T+0 would mean settlements in the same day and instant settlement would ensure trades are settled immediately.
“We are now moving to optionally T+0,” Buch recently said at an industry event. “It will happen before the end of this financial year and one year from there (it will be) instantaneous.”
Features of T+0/Instant Settlement Mechanism
Recently, Sebi observed that a high percentage of retail investors bring upfront funds and securities before placing the order.
T+0 settlement enables instant receipt of funds and securities, vis-a-vis existing pay-out on T+1 day. Further, it eliminates the risk of settlement shortages, since both funds and securities will be required to be available before placing the order.
As funds will be credited into clients’ accounts directly, it strengthens investor protection.
Benefits for Clients
T+0 settlement is expected to provide flexibility in terms of faster pay-out of the funds against the securities to the sellers and faster pay-out of securities against the funds to the buyers, the consultation paper said.
Further, the option will allow better control over funds and securities by the investors.
Potential Concerns
While there are several benefits of moving to the T+0 settlement cycle, the consultation paper of Sebi also mentioned the potential concerns on implementation of the same.
With two different segments for order placement, meaning orders for T+0 or instant settlement cycle and for T+1 settlement cycle can lead to:
* Liquidity fragmentation, affecting efficient price discovery
* Increasing cost of trading, as funds and securities have to be made available upfront before placing the orders
* Divergence in the price of the same security in T+0 or instant settlement cycle, and T+1 settlement cycle
* Increase in impact cost in case of lack of liquidity in this segment
Nevertheless, the capital market regulator has sought public comments on the proposal by January 12, 2024.
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