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Sebi's Reforms: 1-Hr Trade Settlement & Asba-Like Secondary



  Sep 14, 2023

From T+1 to T+One Hour:SEBI


Mechanics and Significance

What is Sebi’s proposal regarding trade settlement?

Sebi, the market regulator in India, is proposing to shorten the trade settlement cycle. Currently, trades are settled in T+1, which means one day after the trade. The new proposal aims to settle trades within just one hour of execution.

When is Sebi planning to implement this change?

Sebi plans to implement the one-hour trade settlement cycle starting in March 2024 if everything goes according to plan.

How does this change compare to other countries?

India will be the first country globally to have a T+1 hour settlement cycle. Currently, China is the only other country with a T+1 cycle, while most other major economies, including the US and European countries, have T+2 settlement cycles.

What are the benefits of this one-hour settlement?

The one-hour settlement is expected to provide quicker access to funds and securities, improve market liquidity, reduce various risks, and make the Indian stock market more accessible to investors.

How did trade settlement work in India historically?

In the past, trade settlements in India took several days, with the longest being the T+5 cycle, where it took five days to settle a trade after execution. This has gradually reduced over the years to T+1.

What are some challenges associated with this proposal?

Some challenges include ensuring smooth settlement with foreign portfolio investors (FPIs), especially in cross-currency trades and dealing with time differences. The impact on trade execution costs is also a consideration.

How will investors benefit from this change?

Investors can expect faster settlement of trades, which means they will have access to their funds more quickly. It’s akin to the speed of transactions using the Unified Payments Interface (UPI).
ASBA

What additional facility is Sebi planning to launch?

Sebi intends to launch an Application Supported by Blocked Amount (Asba)-like facility for trading in the secondary market by January 2024. Asba is designed to facilitate the application and allotment process for various securities offerings. Application Supported by Blocked Amount (Asba): This is a mechanism introduced by Sebi to simplify the process of applying for shares in various securities offerings, such as Initial Public Offerings (IPOs) or rights issues. When an investor applies for shares through Asba, the application amount is blocked in their bank account, but the money is not immediately transferred to the issuer. It remains in the investor’s account until the final allotment is made. This system ensures that investors’ funds are reserved for the allotment but not immediately deducted from their accounts.
 
Example:Let’s say Investor A wants to apply for shares in an IPO. Instead of transferring the entire application amount upfront, which could be a substantial sum, Investor A uses the Asba facility. They provide their bank details, and the required amount is blocked in their account but not debited. Now, if Investor A is allotted shares, the blocked amount will be used to pay for those shares. If not allotted, the blocked amount is released back to Investor A’s account.
Sebi’s Plan for Secondary Market: Sebi is planning to introduce a similar Asba-like facility for trading in the secondary market. This means that when investors want to execute trades in existing stocks, they may have the option to block a specific amount for those trades without transferring the money immediately. This can be particularly useful for investors who want to ensure they have enough funds to cover their trades but prefer not to move the money until the trade is executed.
 
Example:Investor B wants to buy 100 shares of Company X, but they are uncertain about the exact price at which they will buy. Instead of transferring the full amount required for 100 shares upfront, they use the Asba-like facility. They specify the maximum amount they are willing to spend on this trade, and that amount is blocked in their account. Now, if Investor B decides to execute the trade later and the shares’ price falls within their specified budget, the blocked amount can be used to purchase the shares.
 
In summary,Sebi’s plan to launch an Asba-like facility for the secondary market aims to provide investors with more flexibility and control over their funds when trading in existing stocks, similar to how it simplified the process for participating in securities offerings like IPOs.
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