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Context: The Securities and Exchange Board of India (SEBI) has proposed a new settlement cycle, moving from T+1 to T+0 and introducing an instant settlement cycle on an optional basis.

Current Settlement Cycle

• T+1 Cycle: Currently, securities and funds are settled by the next day of the trade (T+1).
• Introduced in 2021: The T+1 settlement cycle was introduced in 2021 and fully implemented in January 2023.

SEBI's Proposed Changes

Two-Phase Implementation:

• Phase 1 (T+0 Settlement Cycle): An optional T+0 settlement cycle is proposed for trades till 1:30 PM, with settlement to be completed on the same day by 4:30 PM.
• Phase 2 (Instant Settlement Cycle): An optional immediate trade-by-trade settlement may be carried out, with trading till 3:30 PM.

Top 500 Listed Equity Shares

• SEBI suggests that T+0 settlement shall be made available initially for the top 500 listed equity shares based on market capitalization.

Surveillance Measures and Restrictions

• Surveillance measures applicable in the T+1 settlement cycle will also apply to securities in the T+0 settlement cycle.
• Securities under the trade-for-trade settlement will not be permitted for T+0.

Why SEBI is Proposing a Shorter Settlement Cycle

• Market Growth: Indian securities markets have witnessed significant growth in terms of volumes, value, and the number of participants in recent years.
• Efficiency and Safety: The increase in new investors puts a greater responsibility on the regulator to make markets more efficient and safer, especially for retail participants.
• Advancements in Payment Systems: The evolution of payment systems and robust technologies presents opportunities to advance clearing and settlement timelines.

Features of Proposed T+0 Settlement Mechanism

• Instant Settlement: An instant settlement mechanism would enable the instant receipt of funds and securities, eliminating the risk of settlement shortages.
• Enhanced Investor Control: It strengthens investor protection by enhancing investor control over securities and funds.

Potential Benefits

• Flexibility for Clients: Faster pay-out of funds against securities to sellers and vice versa, providing flexibility for clients.
• Efficiency for Securities Ecosystem: Faster pay-out of funds against securities to sellers and faster pay-out of securities against funds to buyers, enhancing efficiency for the securities market ecosystem.
• Strengthening Indian Equities: Providing the option for instant settlement aims to establish Indian equities as an asset class with features of resilience, low cost, and transaction speed, making it superior to emerging alternative asset classes.

Conclusion

• SEBI's proposal for a T+0 settlement cycle and instant settlement on an optional basis is driven by the need to adapt to market growth, enhance efficiency, and cater to the preferences of investors who increasingly value reliability, low-cost, and high-speed transactions. If implemented, it could potentially provide investors with more flexibility and strengthen the overall efficiency of the securities market in India.

Must Read Articles:

Instant Settlement of Trades: https://www.iasgyan.in/daily-current-affairs/instant-settlement-of-trades#:~:text=T%2B0%20is%20a%20proposed,same%20day%2C%20without%20any%20delay.

One-Hour Trade Settlement: https://www.iasgyan.in/daily-current-affairs/one-hour-trade-settlement

PRACTICE QUESTION Q. What key regulatory measures has the Securities and Exchange Board of India (SEBI) implemented to foster transparency and safeguard investor interests in the Indian financial markets?