CUTTING TO THE CHASE

T+0 settlement buzz heats up as SEBI response looms

A great reform is in the making for the Indian stock markets. Capital markets regulator, the Securities and Exchange Board of India (SEBI) is working on plans to shorten the trade settlement cycle for equity investments. The regulator had come out with a consultation paper in December on optional same-day trade settlement for equity cash market. Public comments were sought till 12th January.

According to the proposal, India will switch to same-day trade settlement (by evening on the trade day if the trade is executed by 1.30 p.m.). Later, the regulator has plans to make trade settlement instantaneous (settlement within one hour of trade execution). It is important to note that same day trade settlement would remain optional for the investor, and they can continue to opt for the current T+1 trade settlement cycle.

India has come a long way as far as trade settlement in stock markets is concerned. India switched to T+1 settlement cycle (one day post trade execution) in January ’23. This switch happened after a wait of 20 long years as the last switch to T+2 (two days post trade execution) happened way back in 2003. To highlight, the settlement cycle was shortened to T+3 from T+5 in 2002, and subsequently to T+2 in 2003.

Although shortening of the trade settlement cycle in the stock market is a global trend currently, India has been at the forefront. The aim is to lower counter-party risk, especially post Covid and other geo-political events, and release capital for investors, which is otherwise stuck in the system during the settlement period.

Advancements in technology in the stock market intermediaries’ space and robust payment system has helped serve this purpose. For India, the Unified Payment Interface (UPI) with its real-time fund transferring and Electronic Know Your Customer (e-KYC) has been a silent revolution for the markets.