SEBI Working On Instant Settlement In Stock Markets: Here Is What Its Means For Investors

The announcement came on the same day as the Securities and Exchange Board of India announced that it will move to a T+1 settlement cycle for all scrips, effective October 1, 2023

SEBI Chairperson Madhabi Puri Buch said that the Capital Markets regulator is aiming to introduce instantaneous settlement of trades on the stock exchanges by the next fiscal year (FY25). ( Image Source :Getty )

SEBI Chairperson Madhabi Puri Buch on Monday said they are working to introduce an instantaneous settlement timeline on the stock exchange. The comment came on the same day as the Securities and Exchange Board of India (SEBI) announced that it will move to a T+1 settlement cycle for all scrips, effective October 1, 2023. Under the T+1 settlement cycle, if an investor sells securities, the money gets credited into their account the next day. Let us try to understand what this means for market investors and how SEBI plans to make securities settlement even shorter. 

What Has SEBI Announced?

Buch, as per the Indian Express said, “One of the things that we think is not very far off is the instantaneous settlement on the stock exchanges. We are currently working on that. We are also engaged with the ecosystem. We believe that in future we will have a mechanism which will facilitate instantaneous settlement of transactions on stock exchanges.” 

Addressing a press conference on Monday, she also said that Same-day, or ‘T+0’, settlement of trades will be possible with the real-time payment system — Unified Payments Interface (UPI), online depositories, and technology stack. 

The Market regulator also announced that from October onwards, the T+1 settlement will apply for all scrips, not just the most popular or highly traded ones.

Earlier this year January 27, Stock markets moved from the T+2 settlement cycle to the T+1 regime for popular equities. Shares of about 200 of India’s biggest listed companies — together comprising 80 per cent of the country’s equity market — moved to the T+1 settlement cycle.

Now from October onwards, all scrips will follow the T+1 settlement cycle. All securities, including stocks, debt instruments, REITs, InvITs, and ETFs, which were earlier under the T+2 settlement cycle, would transition to the T+1 trade settlement cycle.

How Does Trading Settlement Work?

A trade settlement is completed once purchased securities of a listed company are delivered to the buyer, and the seller gets the money. Earlier, trades on the Indian stock exchanges settled in two working days after the transaction was done (T+2).

T+1 (trade plus one) means that market trade-related settlements will need to be cleared within one day of the actual transactions taking place. The T+1 cycle came into effect on January 27 this year for top-listed firms making India the second market after China to switch to the T+1 system.  October onwards, all scrips will follow the T+1 settlement cycle. This shorter settlement timeline is expected to bring operational efficiency, faster fund remittances, share delivery, and ease for stock market participants, as per the IE report. 

T+0 or Instantaneous Settlement 

Chairperson Madhabi Puri Buch, as per the reports, said that the Capital Markets regulator is aiming to introduce instantaneous settlement of trades on the stock exchanges by the next fiscal year (FY25). As per the report, the T+0 settlement cycle will help investors sell shares and get the money in their account instantaneously, and the buyers will get the shares in their demat accounts the same day. 

According to a Bussines Standard report, the T+0 will enhance liquidity for traders and investors and this will ultimately increase the overall volumes. Nirav Karkera, Head of Research at Fisdom told Bussines Standard that such introduction of instant settlement will have a direct, positive impact on the cash segment where volumes can be expected to pick as investments move across stocks without delay.

"Right now, investors need to wait for settlement to buy another share in the cash segment or rely on limits offered by the stockbroker. While the first case renders the entire investment experience as inefficient, the second involves a lot of subjectivity on the stockbrokers’ end. Such developments can also be expected to help stockbrokers, as the degree of risk on account of defaults on margins offered to clients will drop significantly," said he said. 

The report also noted that T+0 will also allow investors to seize short-term trading opportunities, as they can immediately reinvest proceeds from a sale into a new purchase without waiting for settlement.  However, the SEBI chairperson said the shift to instant trade settlement will need some more work.

The success of achieving instant settlement heavily relies on the efficiency of the ASBA (Application Supported by Blocked Amount) infrastructure. Existing delays in the system impede the speed and volume of capital formation and also introduce potential risks of financial losses throughout the entire value chain.

SEBI's plans hinge on the success of the newly introduced ASBA for secondary market transactions, Buch said, adding that she is confident of succeeding in the recent introduction. "… we think that the natural next step is instantaneous settlement (after Asba for secondary markets). Will it (instantaneous settlement) be completed by this financial year? Not sure, could be. But it may spill over to next year as well," the chairperson said, as a PTI report. 

The investment banker-turned-regulator Buch emphasised the critical importance of timing in capital markets, highlighting how delays can significantly impact the economy's capital formation, which falls under SEBI's core mandate. SEBI has been actively working on reducing processing times for various activities like clearing equity issuances, introducing new mutual fund schemes, and facilitating other fundraising endeavors. These efforts have been greatly assisted by technology tools, playing a pivotal role in expediting processes.

As a result of these interventions, the investor community has reaped substantial monetary benefits, amounting to Rs 3,500 crore annually. The most significant advantage, totaling Rs 2,300 crore, was achieved through the implementation of an ASBA-like system for trading, SEBI Chairperson said. 

The SEBI has been diligently monitoring turnaround times across multiple aspects and has taken various measures, such as automation, streamlining processes, and allocating additional resources, to speed up tasks efficiently, she further added.