SEBI should not stop at the T + 1 regulation

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

The SEBI has given the exchanges the freedom to start T + 1 settlement on a voluntary basis as of January 1, 2022, in the scripts of their choice. He further informed the exchanges that they can offer a T + 1 settlement cycle on any script after one month’s notice and continue for at least six months. To return to the T + 2 regulation, at least one month’s notice must be given.

Already in 2013, SEBI had mentioned the idea of ​​a T + 1 settlement for securities in a discussion document in order to reduce the overall risk of 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 the sale. But at that time, SEBI anticipated some problems in the T + 1 regulation.

When brokers accepted checks for purchases, clearing those checks took two or three business days. Therefore, effectively, there could be no payment until these checks were cleared by the customers.

There was also a question mark over the cost and benefits of implementing the T + 1 settlement by modifying existing trading and settlement systems for greater automation and efficiency.

But now, with the penetration of online money transfer, it is possible to speed up the settlement system.

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

SEBI should be inspired by the mechanism for transferring funds in banks. The RBI provided the Real-Time Gross Settlement System (RTGS), which allows banks to transfer rupee crores every day seamlessly within seconds. In addition, under the National Electronic Funds Transfer (NEFT) and Immediate Payment Service (IMPS), banks offer fast transfer of funds. For example, on October 5, 2021, banks completed 2,254.76 lakh online transactions, showing that the technological capability we have can be replicated by exchanges as well.

There can only be one difference between the transfer of bank funds and the scholarship settlement system. The first is one-way, that is, one account will be credited and another account will be debited with the same amount. But the capital market needs the transfer of funds on one side and the reciprocal transfer of dematerialized stocks on the other. Thus, each transaction will have two debits and two credits. But the two can be integrated and cleaned together.

Current layout

At present, we have the following provisions to enable T + 2 settlement:

Deposit: Hold shares in dematerialized form. Investor purchases are credited and investor sales are debited here.

Compensation company: He takes care of the confirmation, settlement and delivery of shares. He acts as a buyer for the seller and a seller for the buyer. In simpler terms, it makes it easier to buy on one side of the deal and sell on the other. It guarantees short and consistent settlement cycles while controlling transaction risks and providing a counterparty risk guarantee.

Clearing Members and Custodians: The Clearing Corporation transfers each trade to a Clearing Member or Custodian and ensures that funds and shares are available on the day of settlement.

Compensation banks: SEBI has authorized 13 banks which facilitate the settlement of funds,

Instead of taking small steps, SEBI can undertake far-reaching reform and introduce real-time settlement for stock traded stocks. This will provide greater liquidity for market participants. In the NSE, the average daily CM segment revenue in September 2021 was 68,525 crore. From there, we can imagine the amount of funds that will be released by opting for real-time settlement. While T + 1 will benefit investors and market participants by reducing systemic and operational risks, real-time settlement will almost eliminate these risks. It can also be a precursor for other foreign markets to follow us.

The writer is a retired banker

About Nicole Harmon

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