The Securities and Exchange Board of India (Sebi) is considering the implementation of a T+0 (same day) settlement cycle in two phases as an initial step towards instantaneous settlement.
The shorter settlement cycle of T+0 is being considered for the equity cash segment as an optional mechanism in addition to the current T+1 (Trade plus one day) cycle.
The market regulator has floated a consultation paper charting out the mechanism for T+0 settlement and to seek comments on the challenges. Further, Sebi has tried to address the concerns around fragmented liquidity raised by several foreign portfolio investors (FPIs) and institutional investors.
The two-phase migration has been suggested to examine the impact of the shorter settlement cycle on the market and operational and technological issues.
At present, settlements happen in a T+1 (trade plus one day) settlement cycle in which the securities and funds are credited to the demat account the next day of the trade. India moved to the T+1 cycle for all listed companies only this year.
Sebi Chairperson Madhabi Puri Buch had earlier indicated a timeline of March-end next year for implementing T+0 settlement and transition to instantaneous settlement 12 months after that.
In phase 1, an optional T+0 settlement cycle is envisaged for trades till 1:30 pm with settlement of funds and securities to be completed on the same day by 4:30 pm. In the second phase, an optional immediate trade-by-trade settlement may be carried out for trades till 3:30 pm.
Sebi’s paper suggests that once phase 2 has been implemented, phase 1 will be discontinued.
In the first phase, custodian clients like FPIs and certain institutional investors may be excluded. These clients will be allowed in the second phase.
Sebi said that the shorter settlement cycle will further free up capital in the securities market, enhance risk management by clearing corporations and allow investors to have better control of their funds and securities.
On concerns around liquidity fragmentation, Sebi’s paper said that there will be participants who can access both T+0 (or instant settlement) and T+1 markets and would bridge price and liquidity gaps between the two segments.
“The issue of divergence of prices for the same scrip between the two segments (T+0 or Instant settlement cycle, and T+1 settlement cycle), can also be addressed by the introduction of price bands between segments (of say +100 basis points), which ensure limited divergence in the prices between the T+1 settlement cycle and T+0 or instant settlement cycle,” states the report.
Sebi has recognised that the two different cycles can affect price discovery, increase the cost of trading, increase impact cost in case of lack of liquidity, and result in divergence in prices.
Further, the T+0 settlement will be made available for only the top 500 companies by market capitalisation in the initial stages. Similar to what India adapted for the transition to T+1, for T+0 too, it will be done in three tranches of 200, 200, and 100 companies from the lowest to highest market cap.
As per the report, the exchange will publish a common list of securities and calendar for migration to T+0 and create a separate series or scrip code for T+0.
As the Indian market will be moving towards a block-mechanism (ASBA) for the secondary market from January 2024 onwards, the consultation paper addresses the transactions and trades done by the UPI clients too.
First Published: Dec 22 2023 | 8:06 PM IST
