Sebi pitches instant equity settlements

Market participants said retail investors making delivery-based trades stand to benefit if the proposal in the regulator’s consultation paper makes it to the final stage, since they will receive proceeds instantaneously. 

This would be especially beneficial for investors selling shares since they will immediately receive money, which can be reinvested elsewhere. Buyers too will receive shares immediately, allowing them to pledge the shares and raise capital for further trading.

Currently, all share transactions in stock markets are settled on a T+1 basis; shares are credited to the buyers’ demat account and money credited to the seller’s bank account a day after the transaction.

The Securities and Exchange Board of India (Sebi) said in the consultation paper that the proposed framework will be implemented in two phases: in the first phase, market participants will be offered T+0 settlement, which means investors receive their payouts by the end of same trading session.

In the second phase, the settlement time will be instantaneous. However, no client code modifications will be permitted in the second phase since trades are instantly settled, and hence, orders cannot be altered. Market participants can provide their feedback to Sebi on these proposals by 12 January.

“In today’s age, reliability, low cost and high speed of transactions are key features that attract investors to particular asset classes. To that extent, reducing settlement time and hence increasing operational efficiency of dealing in Indian securities can further draw and retain investors into this asset class," Sebi said in the discussion paper.

Instant settlement will benefit retail investors and drive up turnover in the market, making it more liquid and deep, market participants added. “If I get money on the same day by selling a stock , I could well buy a new one," said Gaurang Shah, SVP, Geojit Financial Services. “It will also reduce the leverage as an investor wouldn’t have to borrow to buy shares."

While the regulator will not discontinue T+1, experts said most trades may shift to the new system since it offers better efficiency.

“Despite the circular giving the option to continue with the T+1 settlement system, I think people would migrate to the instantaneous settlement over time once this comes into vogue from FY25," said Siddarth Bhamre, EVP, research, Religare Broking “Turnover of markets would rise and deliveries could also increase, with cash being credited the same day to a seller’s account, which he or she could use to buy new shares." Sebi also said the new system will ensure better risk management for clearing corporations (CCs).

“The option will enhance overall risk management of CCs, as the trades are backed by upfront funds and securities," Sebi said. “Shorter settlement cycle will further free up capital in the securities market, thereby enhancing the overall market efficiency."

One of the key concerns expressed by the industry against the proposal was that having two settlement systems could fragment market volume and lead to a situation where the same scrip is trading at two different prices (one in T+1 settlement segment, the other in instantaneous settlement segment). 

Sebi has tried to allay these fears: On fragmenting volumes, Sebi said there will be many investors who will be registered both on the instant settlement platform and T+1 platforms. It added that arbitrage traders would be able to bridge such a gap. On the price divergence front, Sebi has proposed setting up price bands which would ensure that a scrip is trading at similar levels on both platforms.

The T+1 system will not be discontinued, since all offshore funds trading via custodians typically use the T+1 system, market participants added.

pavan.burugula@livemint.com