The Securities and Exchange Board of India (SEBI) is continuously working on a new initiative that will implement instant trade settlement in the Indian stock market, which is at T+0. This will be possible through Unified Payments Interface (UPI), online deposits and technology.
It means that trades would settle immediately, instead of the current T+1 settlement cycle, which means that trades will settle one day after the trade date or within 24 hours of the actual transaction.
SEBI Chairman Madhabi Puri Buch aims to conduct real-time trade settlements in the stock markets. She states: “Certainly one of the things that we think is not too far away is instant settlement on the stock market. We are currently working on it. We think the next natural step is instant settlement. Will it be completed in this financial year?” “I’m not sure, it could be, but it may be extended to next year as well.”
The T+1 settlement cycle was recently announced in January 2023, marking a step from the previous T+2 settlement cycle. It will come into effect from October 1, 2023. This business cycle improves efficiency and simplifies transactions for the stock market.
What are the benefits of the new instant trade agreement?
Instant trade settlement would have a number of benefits for investors and market participants:
Reduced risk for investors: Currently, if an investor sells shares on a given day, they will not receive the proceeds of the sale until the next day. This means that if the market drops sharply overnight, the investor could lose money on the sale. With instant trade settlement, investors would receive the proceeds of their sales immediately, reducing their risk exposure.
Nirav Karkera, head of research at Fisdom, told Business Standard: “This introduction of instant settlement will have a direct and positive impact on the cash segment, where volumes can be expected to increase as investments move between stocks without delay.”
“Right now, investors have to wait for the deal to buy another stock in the cash segment or rely on the limits offered by the stockbroker. While the first case makes the entire investment experience inefficient, the second involves a lot of subjectivity on the part of stockbrokers.” These developments can also be expected to help stockbrokers, as the degree of risk of non-compliance with the margins offered to clients will decrease significantly,” he added.
Greater liquidity in the market: This is because investors would be more likely to trade if they knew they would receive the proceeds from their sales immediately. Greater liquidity would make the market more efficient and benefit all investors.
Avinash Gorakshkar, head of research at Profitmart Securities, told Mint: “SEBI’s move towards instant settlement is expected to increase the pace of new equity issuances, debt issuances and mutual fund scheme approvals. The move is expected to increase volume in the cash segment, as one could move from one action to another on the same date instead of waiting for the settlement of the operation after one or two days (as appropriate in the voucher)”.
Reduced risk of settlement failures: Currently, if a settlement fails, it can have a ripple effect throughout the market, generating losses for investors and market participants. With instant trade settlement, the risk of settlement failures would be significantly reduced.
Reduced Costs for Market Participants – Currently, there are a number of fees associated with settling trades, such as clearing and settlement fees. With instant trade settlement, these fees would be lowered, benefiting investors and market participants alike.
In conclusion, instant trade settlement can be a promising development that could have a number of benefits for the Indian stock market. However, there are a number of challenges that need to be addressed before it can be implemented. If these challenges can be overcome, the instant trading solution could make the Indian stock market more efficient, accessible and secure.