SEBI Proposes Optional T+0 and Instant Settlement of Trades Alongside T+1 in Indian Securities Markets

Consultation Paper Dated 22.12.2023

SEBI has released the Consultation Papers on the Introduction of optional T+0 and optional Instant Settlement of Trades in addition to the T+1 Settlement Cycle in Indian Securities Markets.

Over the last few years, Indian securities markets have seen tremendous growth, both in terms of volumes, value, as well as the number of participants. This increase in the participation of new investors in the securities market puts a greater onus on SEBI to make markets more efficient and safer for its participants, with a special focus on retail participants.

The SEBI, in its endeavour to keep pace with the changing times, shortened the settlement cycle to T+3 from T+5 in 2002 and subsequently to T+2 in 2003. Further in 2021, T+1 settlement was introduced in a phased manner which was fully implemented from January 2023.

In today’s age, reliability, low cost and high speed of transactions are key features that attract investors to particular asset classes. In this regard, SEBI has envisaged that for the equity cash segment, in addition to the existing T+1 settlement cycle, a shorter settlement cycle may be introduced as an option.

An instant settlement mechanism will enable instant receipt of funds and securities, vis-a-vis existing pay-out on T+1 day. Also, it will eliminate the risk of settlement shortages, since both funds and securities will be required to be available before placing the order.

The benefits of the proposed mechanism for the client is to provide flexibility in terms of faster pay-out of the funds against the securities to the sellers and faster pay-out of securities against the funds to the buyers. Also, the option will allow better control over funds and securities by the investors.

Further, for the Securities Market Ecosystem, the shorter settlement cycle will free up capital in the securities market thereby enhancing the overall market efficiency.

The proposed mechanism may lead to liquidity fragmentation and affect efficient price discovery. Also, it may increase the cost of trading, as funds and securities shall have to be made available upfront before placing the orders. Further, it may increase impact cost in case of lack of liquidity in this segment.

To mitigate the potential concerns, on liquidity fragmentation, there will be participants who can access both T+0 (or instant settlement) and T+1 markets and would bridge price and liquidities gaps between the two segments.

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