Sebi takes first step to introduce instant settlement in Indian stock market 

The Securities and Exchange Board of India (Sebi) has issued a consultation paper proposing to implement same-day settlement (T+0) and instant settlement on an optional basis in the Indian stock market in two phases. 

While inviting public comments on the issue, the capital market regulator has said that the shorter settlement cycles will be in addition to the current T+1 cycle. 

“The significant evolution of payment systems in the country in recent years coupled with sophisticated and robust technologies used by Markets Infrastructure Institutions (MIIs) appears to present further opportunities for advancing the clearing and settlement timelines, on an optional basis,” stated the Sebi discussion paper. 

“… it is envisaged that for equity cash segment, in addition to the existing T+1 settlement cycle, a shorter settlement cycle may be introduced as an option,” it added. 

As per the Sebi consultation paper, an optional T+0 settlement cycle (for trades till 1:30pm) is envisaged in Phase 1 with settlement of funds and securities to be completed on the same day by 4:30pm. 

In Phase 2, thereafter, an optional immediate trade-by-trade settlement (funds and securities) may be carried out for all trades i.e. for all transactions done till 3.30pm. 

Incidentally, the settlement cycle was shortened from T+5 to T+3 in 2002 and subsequently to T+2 in 2003. Further in 2021, T+1 settlement was introduced in a phased manner, which was fully implemented from January 2023. 

As per the Sebi consultation paper, to begin with, T+0 settlement will be made available in the top 500 listed companies based on market capitalisation -- this will be done in three tranches of 200, 200, 100 from lowest to highest market capitalisation. 

In terms of the potential benefits of T+0 or instant settlement mechanism, the regulator believes that the option 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. 

Further, from an overall market perspective, the watchdog believes it will further free up capital in the market thereby enhancing the overall market efficiency while also enhancing the overall risk management of clearing corporations as the trades will be backed by upfront funds and securities. 

On the other hand, there could be concerns as well on account of two settlement cycles including liquidity getting fragmented thereby affecting efficient price discovery while also increasing the impact cost. 

It could also increase the cost of trading, as funds and securities will have to be made available upfront before placing the orders. 

The Sebi paper, however, stated that potential concerns can be mitigated as well since “there will be participants who can access both T+0 (or instant settlement) and T+1 markets and would bridge price and liquidities gaps between the two segments”.

Also Read: Sebi releases consultation paper on implementation of instant trade settlement: What it says