Sebi plans to set up an allocation of shares in T + 1 which is currently in T + 2. As a stock market investor, if a person today buys shares of a company from the BSE or the NSE, they will get the shares transferred to their DMAT account in exchange + 2 days (T + 2) . He can then sell his shares or keep them. On the other hand, the investor who sells the shares will get funds transferred to his account within T + 48 hours. From now on, this payment is offered in T + 1 day. Before 2003, the settlement cycle was T + 3 days.
The stock market settlement cycle refers to the time between the trade date, when an order is executed on the market, and the settlement date, when participants exchange cash for securities or stocks. . Sebi has given the stock exchanges the option of adopting T + 1 depending on their readiness from 2022. The Sebi circular states that if the exchange wishes to opt for the T + 2 settlement cycle in between, it will have to give one month’s notice. in advance.
What is Sebi’s intention behind the implementation of this new settlement system?
At the request of market players, SEBI proposed this proposal to modify the settlement cycle of transactions in T + 1, which means that the shares will now be transferred in T + 24 hours.
SEBI made this decision in consultation with market infrastructure institutions such as stock exchanges, clearing houses and depositors. Some market players have expressed their concerns about the functioning problems of this T + 1 settlement system.
Shortening the settlement cycle will create greater efficiency in the market and further protect the interests of investors. Accelerating the settlement cycle will help reduce operational risk, liquidity requirements, counterparty risk, which would also reduce margin requirements and collateral requirements for brokers.
What are the means for the different types of investors?
This decision will be very beneficial for large investors such as companies, FIIs, DIIs, who invest large amounts. Settling a day earlier can give them more liquidity and reduce the margin requirement. While for small investors or retail investors this won’t have much impact on D + 1 settlement.
However, it should be made clear here that individual retail investors contribute 45% of daily trading volumes on exchanges and the remaining 55% includes companies, FIIs, DIIs, proprietary traders and others.
What are the advantages and disadvantages for common investors of the T + 1 settlement cycle?
It will allow investors to receive their funds sooner after the trade has been executed and settled. In addition, many operational and market risks can be mitigated.
Switching to a T + 1 settlement cycle is a complex undertaking and will require significant planning, execution and testing and it would fundamentally change the structure of the market.
We believe that if the infrastructure is upgraded with robust technology and a fast and transparent settlement process, the probabilities of technical issues can be lessened.
Will the new settlement cycle make a difference in market volatility?
Market volatility is sure to increase and investors should watch their new bets closely. Most of the exchanges in developed countries like the United States, United Kingdom and Japan currently follow the T + 2 trade settlement cycle.
There will be complexities in this arrangement, but the shorter settlement cycle will generate greater operational efficiency and significantly lower capital requirements. We recommend doing the pilot test for two days and if it works well it can be extended to a week and if the test is successful it can be implemented permanently.
(Amit Pamnani is Director of Investments and Managing Director of Investment Banking at Swastika Investmart Ltd.)
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