• The Securities and Exchange Board of India (SEBI) has proposed the introduction of a facility for clearing and settlement of funds and securities on T+0 (same day) and instant settlement cycle on an optional basis.
• The facility will be in addition to the existing T+1 (trade plus one day) settlement cycle in the secondary markets for the equity cash segment.

T+1 settlement cycle

• Background: Trade settlement
• Settlement is a two-way process which involves the transfer of funds and securities on the settlement date.
• A trade settlement is said to be complete once purchased securities of a listed company are delivered to the buyer and the seller gets the money.
• Current cycle of trade settlement
• SEBI has shortened the settlement cycle to T+3 from T+5 in 2002 and subsequently to T+2 in 2003.
• Currently, Indian stock market follows the cycle of T+1.
• The migration to the T+1 cycle came into effect in January 2023.
• India became the second country in the world to start the T+1 settlement cycle in top-listed securities after China.
• About T+1 Settlement Plan
• The T+1 settlement cycle means that trade-related settlements must be done within a day, or 24 hours, of the completion of a transaction.
• For example, under T+1, if a customer bought shares on Wednesday, they would be credited to the customer’s demat account on Thursday.
• Benefits
• In this format, if an investor sells a share, he/she will get the money within a day, and the buyer will get the shares in her demat account also within a day.
• A shorter settlement cycle reduces the exposure to counterparty risk, as the parties involved in the trade settle their obligations more quickly.
• A T+1 settlement cycle not only reduces the timeframe but also reduces and frees up capital required to collateralize that risk.

T+0, Instant settlement cycle

Proposal of SEBI

• A shorter settlement cycle may be introduced
• In addition to the existing T+1 settlement cycle, a shorter settlement cycle may be introduced as an option.
• It proposed to implement it in two phases:
• Phase 1: T+0 Settlement Cycle and
• Phase 2: Instant Settlement Cycle.
• Phase 1: T+0 settlement cycle
• An optional T+0 settlement cycle (for trades till 1:30 PM) is envisaged, with settlement of funds and securities to be completed on the same day by 4:30 PM.
• Phase 2: Instant Settlement Cycle
• An optional immediate trade-by-trade settlement (funds and securities) may be carried out. In the second phase, trading will be carried out till 3.30 pm.

Rationale behind the introduction of a shorter settlement cycle

• Over the last few years, Indian securities markets have seen tremendous growth, both in terms of volumes, value, as well as number of participants.
• This increase puts a greater onus on the regulator to make markets more efficient and safer for its participants, with a special focus on retail participants.
• The average Indian has rapidly embraced UPI (Unified Payments Interface) and instant payment platforms. This flexibility can be extended to equity dealing as well.
• Also, in today’s age, reliability, low cost and high speed of transactions are key features that attract investors to particular asset classes.

Benefits of instant settlement mechanism

• Eliminate the risk of settlement shortages
• An instant settlement mechanism would enable instant receipt of funds and securities, vis-a-vis existing pay-out on T+1 day.
• It would eliminate the risk of settlement shortages since both funds and securities will be required to be available before placing the order.
• Enhanced Liquidity
• Faster settlement can improve liquidity in the market, as investors can access their funds sooner after selling securities.
• Lower Margin Requirements
• Traders may require lower margin or collateral when they know that settlement will occur rapidly, potentially reducing the cost of trading.
• Reduced Market Risk
• As the market price of the security is less likely to change significantly between the trade execution and settlement.
• Strengthened investor protection
• By enhancing the control of the investor over the securities and funds.
• This is because as funds and securities would be credited into the client’s account directly for those who are trading through blocked amounts using the UPI facility (UPI Clients).
• Will help establish Indian equities as an asset class
• Instant settlement will help establish Indian equities as an asset class with the features of resilience, low cost and time for transaction, superior in all ways to emerging claimants of alternative asset classes.