Why in news?

Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) are all prepared to launch the T+0 or same-day trade settlement, from March 28, 2024.

Currently, Indian markets operate on a T+1 settlement cycle for all stocks.

What’s in today’s article?

• Trade Settlement
• T+1 settlement cycle
• T+0 settlement cycle
• Working of T+0 settlement
• Benefits of instant settlement mechanism

Trade Settlement

• About
  • 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.

T+1 settlement cycle

• 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.

T+0, Instant settlement cycle

• Proposal of SEBI
  • In December 2023, SEBI, in addition to the existing T+1 settlement cycle, proposed the introduction of a shorter settlement cycle 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
• In Phase 1, 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.
• This was proposed to be introduced on an optional basis starting on 28th March, 2024.
• Phase 2: Instant Settlement Cycle
  • In Phase 2, an optional immediate trade-by-trade settlement (funds and securities) may be carried out.
  • In this phase, trading will be carried out till 3.30 pm.

Working of T+0 settlement

• The T 0 settlement will be optional for 25 stocks and will be applicable only for trades executed between 9:15 a.m. and 1:30 p.m.
• Trading in the T+0 cycle will be subject to a price band of 100 basis points above or below prices under the T+1 cycle.
  • To avoid market distortions due to price discrepancies for shares trading in both settlement cycles.

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
  • Shorter settlement cycles can help minimize 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 with the features of resilience, low cost and time for transaction, superior in all ways to emerging claimants of alternative asset classes.