SEBI introduces T+1 Settlement System

Q Why is it in News ?

A The Capital markets regulator Securities and Exchange Board of India (SEBI) has introduced T+1 settlement cycle for completion of share transactions on optional basis in a move to enhance market liquidity.

Q What is T+1 Settlement System?

A 

• T+1 means that settlements will have to be cleared within one day of the actual transactions taking place.
• Currently, trades on the Indian stock exchanges are settled in two working days after the transaction is done (T+2).
• In April 2002, stock exchanges had introduced a T+3 rolling settlement cycle. This was shortened to T+2 from April 1, 2003.

Q What has Sebi allowed?

A 

• SEBI has allowed stock exchanges to start the T+1 system as an option in place of T+2.
• If it opts for the T+1 settlement cycle for a scrip, the stock exchange will have to mandatorily continue with it for a minimum 6 months.
• Thereafter, if it intends to switch back to T+2, it will do so by giving one month’s advance notice to the market.
• Any subsequent switch (from T+1 to T+2 or vice versa) will be subject to a minimum period.
• A stock exchange may choose to offer the T+1 settlement cycle on any of the scrips, after giving at least one month’s advance notice to all stakeholders, including the public at large.

Q Why T+1 settlement?

A 

• Reduced settlement time: A shortened cycle not only reduces settlement time but also reduces and frees up the capital required to collateralize that risk.
• Quick settlement: T+1 also reduces the number of outstanding unsettled trades at any instant, and thus decreases the unsettled exposure to Clearing Corporation by 50%.
• Speedy recovery of assets: The narrower the settlement cycle, the narrower the time window for a counterparty insolvency/bankruptcy to impact the settlement of a trade.
• Risk reduction: Systemic risk depends on the number of outstanding trades and concentration of risk at critical institutions such as clearing corporations, and becomes critical when the magnitude of outstanding transactions increases.

Q How does T+2 work?

A 

• If an investor sells shares, settlement of the trade takes place in two working days (T+2).
• The broker who handles the trade will get the money, but will credit the amount in the investor’s account only.
• In effect, the investor will get the money only after three days.
• In T+1, settlement of the trade takes place in one working day and the investor will get the money on the following day.
• The move to T+1 will not require large operational or technical changes by market participants, nor will it cause fragmentation and risk to the core clearance and settlement ecosystem.

Q Why are foreign investors opposing it?

A 

• Foreign investors operating from different geographies would face time zones, information flow process, and foreign exchange problems.
• Foreign investors will also find it difficult to hedge their net India exposure in dollar terms at the end of the day under the T+1 system.
• In 2020, SEBI had deferred the plan to halve the trade settlement cycle to one day (T+1) following opposition from foreign investors.

Q What are some key details about SEBI ? 

A 

• The SEBI is the regulatory body for securities and commodity market in India under the jurisdiction of Ministry of Finance Government of India.
• It was established on 12 April 1988 and given Statutory Powers on 30 January 1992 through the SEBI Act, 1992.

Jurisdiction of SEBI

• SEBI has to be responsive to the needs of three groups, which constitute the market:

1. Issuers of securities
2. Investors
3. Market intermediaries

SEBI has three powers rolled into one body: quasi-legislative, quasi-judicial and quasi-executive.

• It drafts regulations in its legislative capacity, it conducts investigation and enforcement action in its executive function and it passes rulings and orders in its judicial capacity.
• Though this makes it very powerful, there is an appeal process to create accountability.
• There is a Securities Appellate Tribunal which is a three-member tribunal and is currently headed by Justice Tarun Agarwala, former Chief Justice of the Meghalaya High Court.
• A second appeal lies directly to the Supreme Court.