Editorial. The case for same day settlement of stocks is weak

It is just as well that the stock market regulator is proceeding slowly with the implementation of trade settlement in the equity segment on the same day (T+0) or instantly. The SEBI (Securities and Exchange Board of India) Board has approved the launch of a beta version for settlement of 25 scrips on the same day. Investors will have the option of either settling the same day or after one day (T+1). This same day settlement facility will be available with only a few brokers, so that overall trading in the market is not disrupted.

It is debatable whether this transition is necessary at this juncture. While the regulator is right in noting that our banking system, clearing corporations, custodians, depository participants and trading members have robust systems which can support a transition to T+0 or instant settlement, that is not reason enough to shrink the cycle further. It may be recalled that the trade settlement in India was on a T+2 basis for 18 years from 2003 to 2021. The move to T+1 settlement happened between 2021 and 2023 and India was among the pioneers to do so. Most European markets still follow T+2 cycle and the US and Canadian markets are set to shorten their settlement cycle to one day from this May. It may be best to continue with the T+1 cycle for a few more years to allow domestic and foreign investors to adjust to it.

There are several other reasons why shortening the trading cycle may not be a good idea. One, shorter settlement cycle is likely to cause hardships to foreign portfolio investors in managing their cash-flow from cross-border trades. Larger institutional investors may also be hard-pressed to ensure adequate liquidity for shorter settlements. Two, the regulator needs to weigh the benefits of improving market efficiency against the risk of this facility helping traders churn their money faster during the day, thus increasing speculative activity. Three, the regulator’s initial proposal to make the T+0 settlement optional in some stocks brings with it the risk of dividing liquidity in a stock, thus driving up its impact cost. Price difference between the two settlement cycles would lead to speculative activity.

The market regulator also needlessly appears to be competing with the unregulated private crypto currency markets in trying to provide instant settlement. The consultation paper released by SEBI in December had stated that providing the option for instant settlement will make equities superior to ‘emerging claimants of alternative asset classes’. It is also being put out that if regulated markets do not move towards instant settlement, there is a strong likelihood of investment funds moving from regulated markets towards crypto and similar assets. There is no reason for equity markets, which should be about capital creation and long-term investing, to compete with alternative assets such as cryptocurrencies with no inherent value, operating in a regulatory void.

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