Sebi exploring instant trade settlement: Here's what it means for market, mutual fund investors

Securities and Exchange Board of India (Sebi) chairperson Madhabi Puri Buch highlighted that the recently spoke about instant settlement of trades at the stock markets. The market regulator is aiming to bring real-time transaction settlement process by next fiscal. "Certainly, one of the things we think is not very far off is the instantaneous settlement on the stock exchange. We are currently working on that. We think that the natural next step is instantaneous settlement. Will it be completed by this financial year? Not sure, could be. But it may spill over to next year as well," she said.

For the unversed, Sebi has shortened the settlement cycle to trade day-plus-one (T+1) from T+2 in January this year. The regulator also announced that it would move to a T+1 settlement cycle for all scrips, effective October 1, 2023. The current cycle of T+1 means trade-related settlements happen within a day or within 24 hours of the actual transaction.

"Sebi has been working on reducing the time taken for clearing equity issuances, new schemes by mutual funds and other fund-raising activities. Technology tools have been the biggest help in the process. Such interventions have accrued in monetary benefits of Rs 3,500 crore for the investor community on an annual basis," Sebi chief Buch stated.

She also mentioned that same day or T+0 (instant) settlement of trades would be possible with the real-time payment systems such as Unified Payments Interface (UPI), online depositories and other technology stack.

"This will be a great milestone for the Indian equity market. There are very few markets in the world that settle in even T+1. Many countries are even struggling to bring the settlement to T+1 from T+2. Under the current T+1 settlement cycle, if an investor sells securities, the money gets credited into her account the following day. Under the T+0 settlement cycle, if investors sell shares, they will get the money in their account instantaneously, and the buyers will get the shares in their demat accounts the same day. Settlement in T+0 will enhance liquidity for traders and investors and this will ultimately increase the overall volume settlement of trades. Brokers will also benefit from faster settlement of funds and churning of funds faster. This move will bring down the overall settlement risk to a large extent," said Mukesh Kochar, National Head-Wealth at AUM Capital.

Equity mutual fund (MF) investors are currently getting redemption proceeds in T+2 days as the exchange settles in T+1, Kochar said. So, if the T+0 settlement gets implemented, then this cycle will also reduce to T+1, benefitting MF investors, he added.

For MF investors, an instant settlement means that they will receive the proceeds from their redemptions more quickly, said Arvinder Singh Nanda, Senior Vice-President at Master Capital Services.

"This is because mutual funds will now be able to redeem shares on the same day that they are requested, instead of having to wait two days. This will be a welcome change for MF investors who need the cash from their redemptions quickly and will have the benefit of investing and redemption of MFs on same-day NAV. Overall, instant settlement is a positive development for the Indian stock market and for MF investors. It will increase liquidity, reduce risk, and improve efficiency," Nanda stated.

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