The Securities and Exchange Board of India (Sebi) is contemplating the implementation of a same-day settlement cycle, known as T+0, in two phases.
This is seen as a preliminary step towards instantaneous settlement.
The shorter T+0 settlement cycle is being considered for the equity cash segment as an optional mechanism, in addition to the current T+1 (Trade plus one day) cycle.
The markets regulator has released a consultation paper outlining the T+0 settlement mechanism and seeking comments on potential challenges.
Sebi has also tried to address concerns about fragmented liquidity raised by several foreign portfolio investors (FPIs) and institutional investors.
A two-phase migration has been proposed to assess the impact of a shorter settlement cycle on the market, as well as operational and technological issues.
Currently, settlements occur in a T+1 settlement cycle, in which securities and funds are credited to a demat account the day after the trade.
India only transitioned to the T+1 cycle for all listed companies this year.
Sebi chairperson Madhabi Puri Buch had previously indicated a timeline of March-end next year for implementing the T+0 settlement, with a transition to instantaneous settlement occurring 12 months later.
In the first phase, an optional T+0 settlement cycle is proposed for trades until 1:30 pm, with the settlement of funds and securities to be completed on the same day by 4:30 pm.
In the second phase, an optional immediate trade-by-trade settlement may be implemented for trades until 3:30 pm.
Once phase 2 has been implemented, phase 1 will be discontinued, Sebi has suggested.
In the first phase, custodian clients, such as foreign portfolio investors and certain institutional investors, will be excluded.
These clients will be included in the second phase.
Sebi stated that the shorter settlement cycle will further free up capital in the securities market, enhance risk management by clearing corporations, and allow investors to have better control of their funds and securities.
Regarding concerns about liquidity fragmentation, the discussion paper stated that there will be participants who can access both T+0 (or instant settlement) and T+1 markets, and will bridge price and liquidity gaps between the two segments.
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 the 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, it said.
Sebi, however, has acknowledged that the two different cycles can affect price discovery, increase the cost of trading, increase the impact cost in case of lack of liquidity, and result in divergence in prices.
Furthermore, T+0 settlement will initially be available for only the top 500 companies by market capitalisation.
Similar to India's transition to T+1, the transition to T+0 will also be done in three tranches of 200, 200, and 100 companies, from the lowest to the highest market cap brackets.
According to the paper, exchanges will publish a common list of securities and a calendar for migration to T+0, and create a separate series or scrip code for T+0.
As the Indian market will be transitioning to a block mechanism (ASBA) for the secondary market from January 2024 onwards, the consultation paper also addresses transactions and trades conducted by UPI clients.
Sebi has sought comments on the recommendations until January 12 next year.
