-By Ronit Saraogi
The Indian stock market has been undergoing significant changes in recent years, and one of the most ambitious plans on the horizon is SEBI's proposal to implement a one-hour settlement cycle. This move represents a dramatic shift from the traditional T+3 settlement cycle to a potential T+0 cycle, where trades are settled within the same day, ideally within an hour of execution.
How were the trade settlements done before?
The history of settlement cycles in the Indian stock market is essential to understanding the significance of SEBI's proposed changes. Prior to 2002, trades took three days to settle, with a T+3 cycle meaning buyers received stocks three days after purchase. In 2002, SEBI intervened to reduce this to T+2, improving efficiency. Finally, in January 2023, India adopted a T+1 settlement cycle, aligning itself with international standards. SEBI's vision goes beyond T+1, aiming for a T+0 settlement cycle, where trades are settled within the same day, ideally within an hour of execution. This would mark a dramatic shift in trade speed, potentially making India the first country with such a system. To understand the significance of this proposed change, it is important to break down the current T+1 settlement process. The current T+1 settlement process involves trade execution, confirmation and matching, blocking funds and securities, depository verification, and settlement day confirmation. This process ensures that the buyer and seller agree on price and quantity, and the necessary funds and securities are available and transferred successfully.
Advantages of SEBI's One-Hour Settlement Plan for Investors:
Diminished Counterparty Risk: At the moment, there's a chance that the buyer or seller on the other side of a transaction could break their end of the bargain during the T+1 day settlement period. This window is greatly reduced by a one-hour settlement, lowering the possibility of investor losses.
Enhanced Liquidity: Investors can access their funds and assets considerably faster because to faster settlements. As a result, they can reinvest sale proceeds more quickly and have greater portfolio management flexibility. It is also anticipated that market liquidity will rise overall with quicker turnaround.
Faster Cash Access: Investors can utilize the proceeds of the sale to support other investments or to simply have faster access to their cash because they will receive the proceeds of the sale the same day.
Disadvantages of SEBI's One-Hour Settlement Plan for Investors:
Possibility of Technical Issues: Establishing a system with this level of speed need a strong technological foundation. During the hour-long window, any delays or technical issues could cause trade disruptions and even losses.
Effect on Day Trading methods: In the present T+1 settlement cycle, some day trading methods depend on capitalizing on brief price movements. These techniques may not be appropriate for a one-hour settlement, in which case traders would need to modify their strategy.
Learning Curve and Adjustment: Investors' trading practices and risk-management tactics will need to change in light of the new system. They will have to pay more attention to time and make sure they are enough funds on hand to fulfil settlement obligations in the allotted hour.
Challenges for foreign investors
Pre-funding Requirements: Trade settlement custodians are frequently used by foreign investors to make their investments. They might have to pre-fund their custodian accounts with sizeable sums in order to cover possible trades in the event of a one-hour settlement. This may result in:Diminished Investment Flexibility: Their capacity to quickly invest in other opportunities may be hampered if a sizable portion of their funds are committed to pre-funding.Loss of Opportunity Cost: Potential returns may be lost if pre-funded funds remain inactive in the account and do not earn interest.
Time Zone Differences: Foreign investors may find it challenging to respond to market movements within the one-hour settlement window as a result of time zone differences. This might make it more difficult for them to profit from transient trading opportunities.
“SEBI's one-hour settlement plan has the potential to revolutionize the Indian stock market. While challenges remain, particularly regarding foreign investors, the potential benefits for domestic investors and overall market efficiency are undeniable. As the plan moves forward, it will be interesting to see how SEBI tackles these challenges and brings its vision to reality.”
Conclusion:
In conclusion, the proposed one-hour settlement cycle represents a significant transformation for the Indian stock market. SEBI's ambitious goal of achieving a T+0 settlement cycle has the potential to revolutionize trade speed and market efficiency. While challenges exist, particularly concerning foreign investors, the benefits for domestic investors are clear. As SEBI moves forward with its plan, it will be crucial to address these challenges and ensure a smooth transition to a faster and more efficient settlement system. The Indian stock market is on the brink of a game-changing transformation, and the implementation of a one-hour settlement cycle has the potential to reshape the landscape for investors and mark
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