It is reported that the stock market may adopt T+1 settlement cycle for equity transactions soon. The market regulator, the Securities and Exchange Board of India (SEBI), has set up a panel to bring in T+1 settlement and to address concerns. The proposal once implemented will enable share and money transfers into the clients’ account in less than 24 hours. Currently, we have T+2 cycle and it takes 48 hours for such transfers into the clients’ accounts. If this happens, India will be the only country to adopt T+1 settlement cycle.

The SEBI has given stock exchanges the liberty to start T+1 settlement on an optional basis from January 1, 2022, in scrips of their choice. It has further informed the exchanges that they may offer T+1 settlement cycle on any scrip after giving a month’s notice and to continue it for at least six months. For switching back to T+2 settlement, at least a month’s notice has to be given.

Even as early as 2013, SEBI had mooted the idea of T+1 settlement for securities in a discussion paper to reduce overall risk in the system. Settlement occurs when the buyer’s demat account is credited with the securities and the seller’s bank account with the proceeds of sale. But at that time SEBI anticipated some issues in T+1 settlement.

When the brokers were accepting cheques for purchases, the clearance of such cheques used to take two or three working days. Hence, effectively, there could not be any payment before clearance of such cheques from clients.

There was also a question mark on the cost and benefit of implementing T+1 settlement by changing existing trading and settlement systems for increased automation and efficiency.

But now, with the penetration of online funds transfer, it is possible to expedite the settlement system.

Investors may welcome this move of SEBI as their liquidity will improve. But the question arises: Why should SEBI stop with just T+1 settlement? Why not real-time or same-day settlement at least for cash transactions (other than margin trade, etc., which may be squared up before the end of the day).

SEBI must take cue from the funds transfer mechanism in banks. The RBI has provided the Real Time Gross Settlement (RTGS) system, which enables banks to transfer crores of rupees every day seamlessly within seconds. Also, under National Electronic Funds Transfer (NEFT) and Immediate Payment Service (IMPS), banks provide quick transfer of funds. For example, on October 5, 2021, banks undertook 2254.76 lakh online transactions, and this shows the technological capability we have can be replicated by stock exchanges as well.

There can be only one difference between bank funds transfer and settlement system of stock exchanges. The former is one way, that is, one account will be credited and another account will be debited for the like amount. But the capital market needs transfer of funds on the one side and reciprocal transfer of dematerialised stocks on the other. Hence every transaction will have two debits and two credits. But both can be integrated and cleared together.

Current arrangement

At present, we have the following arrangements for enabling T+2 settlement:

Depository : To hold shares in dematerialised form. Investors’ purchases are credited and investors’ sales are debited here.

Clearing Corporation : This handles the confirmation, settlement, and delivery of shares. It acts as a buyer for the seller and a seller for the buyer. In simpler terms, it facilitates purchase on one end of the transaction and sale on the other. It ensures that the settlement cycles are short and consistent while keeping the transaction risks in check and providing a counter-party risk guarantee.

Clearing members and custodians: The Clearing Corporation transfers every trade to a clearing member or custodian and ensures that funds and shares are available on the settlement day.

Clearing banks : SEBI has authorised 13 banks that aid settlement of fund,

Instead of taking baby steps, SEBI can undertake far-reaching reform and introduce real-time settlement for shares transacted through stock exchanges. This will provide greater liquidity for the market participants. In the NSE, the average daily turnover for CM segment in September 2021 was ₹68,525 crore. From this, we can imagine the quantity of funds that will be released by going for real-time settlement. While T+1 will benefit investors and market participant firms by reducing systemic and operational risks, real-time settlement will almost eliminate such risks. This can also be a trend-setter for other foreign markets to follow us.

The writer is a retired banker

Related Topics
comment COMMENT NOW