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The Securities and Exchange Board of India (SEBI), the capital markets regulator in India, has significantly expanded the scope of its optional T+0 settlement system. This system, which allows for the immediate settlement of trades, is a significant development for the Indian stock market, offering increased efficiency and potentially reducing risks associated with delayed settlements. Initially launched as a beta program in March 2023, encompassing only 25 scrips (stocks) and accessible solely to non-custodian clients, the new expansion dramatically increases the number of eligible securities and expands access to all stock brokers. The expansion will see the inclusion of the top 500 stocks by market capitalization, representing a considerable portion of the Indian stock market's trading volume. This represents a substantial move towards greater market liquidity and reduced counterparty risk.
The phased implementation of the expanded T+0 settlement is designed to minimize disruption and ensure a smooth transition. Beginning January 31st, 2024, the rollout will commence with the bottom 100 stocks on the list of the top 500 by market capitalization, as of December 31st, 2023. An additional 100 stocks will be added each month thereafter, ensuring a gradual integration of the system. This staggered approach allows market participants time to adapt to the new system and facilitates effective monitoring and adjustments by SEBI, allowing for early identification and mitigation of any potential problems. The decision to allow all stock brokers to participate will foster greater competition and potentially lower brokerage fees for investors, furthering the benefits of the T+0 system.
Beyond the expansion of eligible stocks and participant brokers, SEBI has introduced several additional measures to ensure the smooth operation of the T+0 system. Market Infrastructure Institutions (MIIs), responsible for clearing and settlement, are mandated to publish comprehensive operational guidelines and FAQs on their websites. These guidelines will cover crucial aspects such as trading mechanisms, clearing and settlement processes, and risk management strategies. This transparency aims to demystify the T+0 system and empower market participants with the necessary information to participate effectively and confidently. Furthermore, MIIs will be required to submit fortnightly reports on T+0 activities to SEBI, enabling close monitoring of system performance and allowing for timely interventions if necessary. This proactive approach reinforces SEBI's commitment to a stable and secure market environment under the new system.
The introduction of differential brokerage fees for T+0 and T+1 (traditional next-day settlement) cycles offers investors a choice based on their risk tolerance and trading strategies. While T+0 offers faster settlement and reduced risk, it might also come with potentially higher brokerage fees. This flexibility allows investors to tailor their trading approach to their specific needs and preferences. The ability for brokers to set varying fees based on the chosen settlement cycle introduces a competitive element, which is expected to benefit investors in the long run. This approach contrasts with the initial restrictions of the beta program, which only allowed participation from non-custodian clients, suggesting SEBI's confidence in the maturity and robustness of the T+0 system.
The expansion of the T+0 settlement system represents a significant leap forward for the Indian stock market. By expanding access to a broader range of securities and investors, while also implementing stringent monitoring and oversight mechanisms, SEBI aims to modernize the market infrastructure, enhance efficiency, and reduce risks. The gradual implementation strategy and proactive communication measures further demonstrate SEBI's commitment to a smooth and successful transition. While challenges might emerge during the implementation phase, the regulatory steps taken suggest a well-planned and considered approach to optimizing the Indian stock market for the benefit of all stakeholders. The success of this expansion will likely influence similar initiatives globally, further highlighting India’s proactive stance in adopting modern financial technologies.
The long-term implications of this change are substantial. The increased liquidity and efficiency of the T+0 system are expected to draw more foreign investment and bolster the growth of the Indian capital market. However, SEBI will need to remain vigilant in monitoring the system's performance and adjusting its regulations as needed. The potential for increased volatility and risk due to the speed of transactions requires careful oversight and robust risk management frameworks. The success of this initiative will depend on various factors, including the technology infrastructure of MIIs, the adoption rate by brokers and investors, and the overall market conditions. Continued monitoring, analysis, and adaptation by SEBI will be crucial in ensuring the continued success of the optional T+0 settlement system and its positive impact on the Indian financial market.
Source: Optional T+0 settlement cycle to cover top 500 scrips by market value, effective January 31: Sebi