The Securities and Exchange Board of India (Sebi) has recently unveiled a consultation paper outlining a transformative proposal to introduce same-day settlement cycles, specifically T+0 and instant settlement options, in the Indian stock market. The proposal, delineated in two phases, invites public commentary while considering a significant shift in the current T+1 cycle.
According to the Sebi discussion paper, the emergence of advanced payment systems in the country and the robust technological infrastructure employed by Market Infrastructure Institutions (MIIs) offer a promising avenue to expedite clearing and settlement timelines on an optional basis.
The paper envisions introducing a shorter settlement cycle as an optional offering alongside the existing T+1 cycle for the equity cash segment. Phase 1 contemplates an optional T+0 settlement cycle, allowing trades until 1:30 pm to settle on the same day by 4:30 pm. Subsequently, Phase 2 aims to introduce an optional immediate trade-by-trade settlement for all transactions completed until 3:30 pm.
Sebi's historical overview indicates a trajectory of settlement cycle reductions from T+5 to T+3 in 2002, further to T+2 in 2003, and the introduction of T+1 settlement in a phased manner from 2021, fully implemented from January 2023.
In its initial phase, the proposed T+0 settlement will encompass the top 500 listed companies based on market capitalization, segmented into three tranches of 200, 200, and 100 from lowest to highest market capitalization.
The regulator anticipates various benefits from the T+0 or instant settlement mechanism, such as accelerated pay-out of funds against securities for sellers and vice versa for buyers. Additionally, it foresees the initiative unlocking capital, enhancing market efficiency, and bolstering risk management for clearing corporations by ensuring trades are substantiated with upfront funds and securities.
However, there are apprehensions accompanying this proposed change. The introduction of multiple settlement cycles may fragment liquidity, potentially impacting efficient price discovery and amplifying the impact cost. Moreover, trading costs might escalate as upfront availability of funds and securities becomes a prerequisite before order placement.
Sebi's paper acknowledges these concerns and suggests potential mitigating measures. It notes that participants with access to both T+0 (or instant settlement) and T+1 markets could bridge the gaps in pricing and liquidity between the two segments.
The proposal, while promising efficiency gains, invites deliberation on the balance between advantages and potential challenges. Sebi's move signals a significant shift in India's stock market dynamics, warranting careful consideration and comprehensive evaluation from industry stakeholders.
.png)
.png)
0 Comments