A recent statement by Securities and Exchange Board of India (SEBI) Chairperson Madhabi Puri Buch revealed that the regulator plans to move towards one-hour settlement cycle by March 2024 and instantaneous settlement by October 2024. This hurry to compress the settlement period is not desirable because the market migrated to T+1 settlement cycle only this January. Market intermediaries as well as large foreign and domestic investors are still grappling with transition issues.

It is laudable that India has been among the first to move to the shorter T+1 settlement cycle even as most of the larger stock exchanges still follow T+2 or T+3 settlements. The US and Canadian markets are planning to move to T+1 settlement from next year. Only China currently enables same day or instantaneous settlement, but that is limited to some categories. Shorter settlement time does reduce counter-party risk and therefore lesser margin needs to be collected from traders and investors. But continuing to compress settlements without giving market participants time to settle and before the impact of the shorter cycles on trader behaviour and market volumes is fully understood, does not appear prudent.

There is no disputing that the technology infrastructure of the stock exchanges and clearing corporations is very efficient and they may be capable of handling real time settlement of trades too. But given that the T+1 cycle is already giving investors their funds back in just one day, the regulator can afford to hasten slowly in moving towards same day or instantaneous settlements. Such speedy settlements are not really necessary for long-term investors who form the key user segment. On the other hand, speedier access to trading capital will only lead to more trading, especially in derivatives segment, which is not very conducive for long-term growth of the market. This is already evident, with derivative trading volume on the NSE increasing 28 per cent in July 2023 compared with the same month last year; while cash turnover is up 56 per cent in the same period. With data pointing towards more retail investors dabbling in risky stock and index futures, the regulator’s move to shorten settlement cycles will only stoke this trading frenzy.

Another fallout of these short settlements is the difficulties faced by smaller intermediaries in adapting to these rules. Stock brokers have approached the exchanges and SEBI pointing out that they are being levied stiff penalties due to their inability to cope with the new rules relating to maintaining adequate margins, segregation of client funds, monitoring bank balances of clients and other disclosures mandated over the last three years. While these changes are required for protecting investors, the implementation needs to be done in a non-disruptive manner. SEBI needs to tread cautiously in the matter of shortening settlement period further, given the runaway speculation on domestic bourses now.