Sebi proposes optional T+0, instantaneous settlement for equity cash segment

The market regulator hopes this will increase participation in the market.

The market regulator has proposed optional T+0 and instantaneous settlement of trades, in addition to T+1 settlement cycle, in the equity cash segment.

In a consultation paper released on December 22, the Securities and Exchange Board of India (Sebi) stated, "In today’s age, reliability, low cost and high speed of transactions are key features that attract investors to particular asset classes. To that extent, reducing settlement time and hence increasing operational efficiency of dealing in Indian securities can further draw and retain investors into this asset class."

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It added, "In this regard, it is envisaged that for equity cash segment, in addition to the existing T+1 settlement cycle, a shorter settlement cycle may be introduced as an option."

The regulator plans to implement this in phases. In Phase 1, optional T+0 cycle will be implemented for trades taken till 1:30 pm. Then, settlement of funds and securities is to be completed by 4:30 pm.

In Phase 2, there will be an optional instantaneous trade-to-trade settlement for both funds and securities. In this, trading will be done till 3:30 pm.

After Phase 2 of optional instantaneous settlement is implemented, Phase 1 of optional T+0 will be discontinued, said the paper.

To begin with, eligible securities for T+0 settlement will be the top 500 listed companies based on the market capitalisation. They will be transitioned to the new settlement cycle in three tranches of 200, 200 and 100 from lowest to highest market cap.

On concerns that this may increase cost of funding for clients, the regulator said that high percentage of retail investors bring upfront funds and securities before placing the order. For the period June 2023, for around 94 percent of delivery based trades with value up to Rs 1 lakh per transaction, investors made early pay–in of funds and securities.

"Thus, this client base already has funds and
securities made available before placement of order," the consultation paper noted.

Meanwhile, these settlement cycles could deliver various benefits to investors such as better risk management, and better investor protection by giving investors more control over their securities and funds.

This settlement cycle can even make equities more attractive as an asset class than the emerging asset classes, said the paper.

"Providing the option for 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."

There were other concerns by various stakeholders with this new mechanism. For one, there was the worry that this would cause liquidity fragmentation and affect efficient price discovery. Two, there could be a divergence in the price of the same securities in the different settlement cycles. Three, impact cost from lack of liquidity in this segment.

The regulator said that liquidty and price gaps would be addressed because market participants can access both T+0 and T+1 markets, said the consultation paper.

The regulator also believes that any divergences would be bridged by arbitrageurs.

To settle price divergences, the regulator has suggested a solution.

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"The issue of divergence of prices for same scrip between the two segments (T+0 or Instant settlement cycle, and T+1 settlement cycle), can also be addressed by 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. Further, with increase in participation in this segment and active arbitrages, the divergence in prices may be reduced."