Here’s all you need to know about instant settlement in stock markets
Indian stock markets are among the fastest globally with a T+1 settlement cycle; Sebi Chairperson Madhabi Puri Buch has said the regulator is working on an instant settlement mechanism that will see shares and money move on a real-time basis
- Jul 26, 2023,
- Updated Jul 26, 2023 8:22 PM IST
Do we all know what RTGS (Real Time Gross Settlement) is? It is used extensively to transfer money between bank accounts and, as the name suggests, the transfer is done in real time or instantly. Not surprisingly, it is one of the most popular ways to transfer funds.
How about that mechanism being replicated in the Indian stock markets?
To be sure, the Indian stock market is already among the fastest globally in terms of the speed of trade settlement. Currently, a section of the Indian stock markets operates on a T+1 cycle, which means that the trades are settled in a day’s time.
But, capital market regulator Securities and Exchange Board of India (Sebi) is aiming still higher. It has already started working on an instant settlement mechanism.
So, what exactly is instant settlement cycle?
First, let us understand what exactly do we mean by a settlement cycle.
Simply put, settlement cycle refers to the period in which the shares or the funds are transferred to the investor’s account.
As mentioned earlier, the Indian stock markets currently operate on a T+! settlement cycle. This means that if an investor buys shares today (‘T’ in market parlance), the securities will be in the demat account tomorrow. Similarly, a sale transaction would see the money getting credited the next day.
That, in a nutshell is the settlement cycle.
In an instant settlement mechanism – as the name suggests – the settlement would be done instantly or on real-time basis.
It means that the moment an investor buys shares, the securities will be transferred in the demat account. Or, if shares have been sold, then the sale proceeds or the money would be instantly credited to the investor’s bank account.
One may ask that when the Indian stock markets are already among the fastest, what is the need to go faster and try instant settlement?
Well, it is not just about speed or getting more bragging rights.
Trading in the stock markets require margins – the money that needs to be blocked for buying shares – and any reduction in the settlement cycle will free up that amount of margin that can earn interest in the bank account.
This might not hold high significance for the small average retail investor, but for a heavy volume trader or a high net-worth individual (HNI), the margin amounts at stake could be significantly large and hence the interest income would also be huge.
Interestingly, a recent Sebi analysis showed that the annual benefit accrued to investors was around ₹700 crore as a section of the markets moved from T+2 to T+1 settlement cycle as the margin for one trade was freed much faster due to the shorter settlement cycle and the same funds could be used for another transaction.
“… one of the things that we think is not very far off is an instantaneous settlement on the stock exchanges. We are currently working on that; we are engaged with the ecosystem and we believe that not in the very far future we will have a mechanism which will facilitate instantaneous settlement of transactions on the stock exchange,” Sebi chairperson Madhabi Puri Buch had said on July 24 while addressing the media.
She had further highlighted the fact that while the Indian markets are already among the fastest globally in terms of settlement, the technology is already available to take it to the next level.
Do we all know what RTGS (Real Time Gross Settlement) is? It is used extensively to transfer money between bank accounts and, as the name suggests, the transfer is done in real time or instantly. Not surprisingly, it is one of the most popular ways to transfer funds.
How about that mechanism being replicated in the Indian stock markets?
To be sure, the Indian stock market is already among the fastest globally in terms of the speed of trade settlement. Currently, a section of the Indian stock markets operates on a T+1 cycle, which means that the trades are settled in a day’s time.
But, capital market regulator Securities and Exchange Board of India (Sebi) is aiming still higher. It has already started working on an instant settlement mechanism.
So, what exactly is instant settlement cycle?
First, let us understand what exactly do we mean by a settlement cycle.
Simply put, settlement cycle refers to the period in which the shares or the funds are transferred to the investor’s account.
As mentioned earlier, the Indian stock markets currently operate on a T+! settlement cycle. This means that if an investor buys shares today (‘T’ in market parlance), the securities will be in the demat account tomorrow. Similarly, a sale transaction would see the money getting credited the next day.
That, in a nutshell is the settlement cycle.
In an instant settlement mechanism – as the name suggests – the settlement would be done instantly or on real-time basis.
It means that the moment an investor buys shares, the securities will be transferred in the demat account. Or, if shares have been sold, then the sale proceeds or the money would be instantly credited to the investor’s bank account.
One may ask that when the Indian stock markets are already among the fastest, what is the need to go faster and try instant settlement?
Well, it is not just about speed or getting more bragging rights.
Trading in the stock markets require margins – the money that needs to be blocked for buying shares – and any reduction in the settlement cycle will free up that amount of margin that can earn interest in the bank account.
This might not hold high significance for the small average retail investor, but for a heavy volume trader or a high net-worth individual (HNI), the margin amounts at stake could be significantly large and hence the interest income would also be huge.
Interestingly, a recent Sebi analysis showed that the annual benefit accrued to investors was around ₹700 crore as a section of the markets moved from T+2 to T+1 settlement cycle as the margin for one trade was freed much faster due to the shorter settlement cycle and the same funds could be used for another transaction.
“… one of the things that we think is not very far off is an instantaneous settlement on the stock exchanges. We are currently working on that; we are engaged with the ecosystem and we believe that not in the very far future we will have a mechanism which will facilitate instantaneous settlement of transactions on the stock exchange,” Sebi chairperson Madhabi Puri Buch had said on July 24 while addressing the media.
She had further highlighted the fact that while the Indian markets are already among the fastest globally in terms of settlement, the technology is already available to take it to the next level.