Synopsis
The Securities and Exchange Board of India (SEBI) has suggested maintaining the current T+1 settlement cycle alongside providing traders the alternative for instant share settlement.
Last week, the Securities and Exchange Board of India (SEBI) introduced an influential discussion paper on instant settlement of shares, a groundbreaking move that’s unmatched by any advanced or emerging market worldwide. India prides itself as part of an exclusive circle that boasts a T+1 settlement cycle—where trades settle within just one day after being conducted—as opposed to the T+2 or T+3 norms predominantly observed globally. An exploration sheds light on this revolutionary process and its inherent risks.
Understanding Instant Settlement
In the current landscape, Indian share transactions are settled the following day (T+1). SEBI has put forth an innovative mechanism that would enable instantaneous settlements post-trade. This two-phase implementation starts with a T+0 settlement, allowing investors to obtain their funds by the end of the trading session. Then, a shift towards real-time settlements will be introduced.
Importantly, the conventional T+1 cycle remains untouched, with the instant option being precisely that—an option. Those investors at ease with the traditional rhythm can persist with the T+1 framework.
The Boons of Instant Settlement
Retail investors engaging in delivery-based trades stand to gain considerably from SEBI’s proposed system, enjoying the privilege of immediate access to funds. Sellers will particularly benefit from prompt payouts, thus empowering them to reinvest their capital more swiftly. For buyers, the prospect of instant share receipt facilitates further trading possibilities through share pledging.
Moreover, the quick settlement paradigm enhances market risk management. Clearing corporations will now contend with transactions bolstered by ready-to-go funds and securities, raising the safety bar.
Is Instant Settlement Really Optional for Everyone?
The proposal for swift settlements by SEBI offers domestic investors some clear advantages, yet for foreign funds, there’s a snag. They grapple with varied time zones and transact through custodians, necessitating foreign exchange deals to convert dollars into rupees. In light of these hurdles, SEBI suggests an elective approach to immediate settlements alongside the extant T+1 framework, offering flexibility to those not ready to make the shift.
Could Instant Settlements Upset Market Stability?
The voice of the market is one of caution: two settlement cycles might lead to price inconsistency and divide the market.
Imagine trades happening on dual platforms – with instant settlements on one side and T+1 on the other. A buyer’s offer to purchase instantly can’t be paired with a seller’s T+1 order, potentially spawning disparate trading prices for the same stock on both venues. This duality in settlement preference might not only skew prices but thin out trade volumes as well.
Yet SEBI counts on the agility of arbitrage traders to iron out these wrinkles. The play is simple: arbitrageurs could snatch up undervalued shares on one platform and sell them at a premium on the other. This cross-platform churn is expected to recalibrate prices towards harmony between the two trading landscapes.
