Mint Explainer: Sebi’s one-hour trade settlement – A game changer for investors?

What is instantaneous settlement?

Currently, when an investor buys or sells shares from stock exchanges, the transaction is confirmed instantly, but the actual settlement takes time. So once the transaction is confirmed, the buyer doesn’t receive shares instantly, nor does the seller receive the proceeds instantly. Until last year, it used to take two days from the day of transaction (T+2) for the trade to be settled, shares and proceeds transferred. But earlier this year, Sebi cut the timelines to T+1 and now the chairperson has confirmed that the market regulator is working on reducing the settlement time to one hour. The reduced timeline is expected to be finalised by Sebi during the current fiscal. If implemented, India will be the first country in the world to have such short settlement time. The country is already one of the first major economies in the world to have shifted to T+1 settlement scheme.

Why is settlement time important?

Shortening of settlement time will improve the efficiency of the markets. Currently, the buyers must wait for a day to receive the shares. Some of the transactions like pledging the shares for margin or lending the shares through the Securities Lending and Borrowing (SLB) platform can be done only after getting possession of shares. Hence, buyers can avail these facilities quicker if the settlement cycle is shortened. On the other hand, sellers of shares will receive their proceeds quicker and can deploy those faster.

What will be its impact on trading margins?

Generally, any shortening of timelines would help in reducing the margins since brokers calculate margins based on the risk involved and if the transaction is getting concluded faster, it reduces the overnight market risks and hence effectively helps in reducing the margins.

“Shorter settlement cycle will result in a further reduction in the length of exposure to trading parties with each other, lower margin requirements for clearing members and a lessening of liquidity risk.” said Pramit Mishra, principal associate of legal firm MV Kini. “However, it is important to understand that the settlement of trades is a multi-step process involving coordination amongst a wide variety of stakeholders.”

How is India prepared to implement such a settlement?

The market settlement ecosystem of Indian markets has evolved significantly, tapping into many technological advances. For instance, earlier in initial public offerings (IPOs) all retail investors had to use what was called Application Supported by Blocked Amount(ASBA) wherein the bank used to freeze the funds and then give a confirmation to IPO managers post which share allotment used to take place. However, now Sebi has even allowed the fledging Unified Payments Interface (UPI) to be used to subscribe to IPO shares. To facilitate UPI transactions in the market, exchanges and clearing corporations have significantly revamped their settlement systems, say experts.

“The shorter time is highly implementable as Clearing Corporations and Depositories are ready with the systems. UPI’s success created confidence in near real time settlement.” said A Balakrishnan, Executive Director of Geojit Financial Services.