During the recent Global Fintech Fest, Madhabi Puri Buch, the Chairperson of the Securities and Exchange Board of India (SEBI), unveiled a significant strategic shift. SEBI is actively working towards achieving a T+1 hour settlement by March 2024, followed by the audacious goal of 'instantaneous' settlement by October 2024. Importantly, these new settlement options will be presented to investors as an optional choice, offering them greater flexibility in managing their transactions.
Understanding the concept of settlement cycles is crucial for anyone navigating the intricate world of stock markets. These cycles dictate when securities and funds change hands between buyers and sellers following a trade, and having a solid grasp of them is essential for effective market navigation.
To appreciate the significance of these changes, it's helpful to delve into the history of settlement cycles in India and their impact on retail investors. While historical records of the Indian securities market are limited, there is evidence of trading in loan securities of the East India Company in the late 18th century. By the 1830s, trading in bank shares had begun, and the role of the broker emerged in 1830 when six individuals identified themselves as share brokers. This number grew steadily, and until 1850, they conducted their trades under a sprawling Banyan Tree in front of the Town Hall in Mumbai, now known as Horniman Circle Park.
In the 1980s and 1990s, it became increasingly clear that a well-developed securities market was essential for sustained economic growth. The securities market contributes to economic growth by increasing real savings, capital formation, and improving the allocation of investible funds. To achieve these objectives and bring the Indian market up to international standards, a series of reforms to liberalise, regulate, and develop the securities market had been implemented since the early 1990s.
It's important to note that SEBI has a history of curtailing settlement cycle durations. In July 2001, SEBI introduced the rolling settlement system to replace the fixed settlement cycle, which had suffered from issues like subpar delivery, eroding trader trust, and frequent defaults. Subsequently, the settlement timeframe was successively reduced to T+3 in April 2002, further to T+2 in April 2003, and eventually to T+1 by 2023.
Now, SEBI has unveiled its intention to introduce T+1 hour settlement, with the goal of instantaneous settlement by 2024. While most global markets currently operate on a T+2 basis, India has already taken a pioneering position, surpassing even the United States, known as a leading destination for capital markets. These proposed changes position India for significant advancements in trading settlement.
Over the past 30 years, Indian investors have increasingly participated in the market, driven by positive regulation, tightened scrutiny, improved transparency, and expanded market access. The enhanced liquidity resulting from quicker settlement cycles is expected to further boost overall market participation, particularly among young, risk-taking investors. As India is poised for substantial growth in the coming decades, these changes will help increase market penetration.
Additionally, efficiency and transparency in the settlement process will further aid the capital markets with faster fund remittance between the parties and reduction of counterparty risk that investors face. Counterparty risk is the risk that arises when one party involved in a trade fails to fulfill its obligations to the other party.
SEBI, in collaboration with exchanges, intermediaries, and the government, is continuously working to enhance market design, improve efficiency, and transparency, and introduce new products to meet the evolving needs of market participants while safeguarding investor interests. The objective is to establish the Indian securities market as a model for other jurisdictions to emulate. For the implementation of instant settlement, three important prerequisites are required, all of which are readily available in India – a. real-time payment system (UPI); b. online depositories (NSDL and CDSL); c. and a robust technology stack (New age discount brokers).
However, it is essential to scrutinise the practical implications of these changes. While the proposed modifications are expected to enhance liquidity and turnover, their broader advantages may be somewhat limited. Key considerations include potential segmentation of securities, increased trading costs, the impact on futures and options trading, and differences in price discovery. SEBI might also explore the direct implementation of instantaneous settlement rather than relying on the stopgap solution of T+1 hour settlement.
In sum, while certain practical execution and resolution of operational challenges must be addressed, the move is undoubtedly revolutionary, propelling India to the forefront of settlement cycle standards and setting the benchmark for other markets to follow.
The author, Trivesh D, is COO, Tradejini