Sebi is set to release a consultation paper on the potential implementation of instant stock transaction settlements, leading to concerns among foreign institutional investors. The discussion of a dual stream settlement cycle has unsettled these investors, raising fears of market fragmentation.
In January 2023, India completed the implementation of “T+1” settlement, which means that stock trades on exchanges are completed within one day, putting India in the same league as China in achieving this feat. The move was described as a success SEBI, increasing efficiency and reducing risk.
Now, there are talks of a shift towards T+0 settlement, with the possibility of separate segments for T+1 and T+0 participants, allowing investors to choose their settlement basis. It is anticipated that a consultation paper on this matter will be released soon SEBI.
Institutional investors are apprehensive about this move, especially after just adapting to the T+1 settlement. Foreign institutions have raised concerns about the potential market fragmentation and liquidity issues that could arise with the implementation of the new settlement cycle.
The idea of market fragmentation has been less of a concern in Indian markets, with 93% of the equity share volume transacted on the National Stock Exchange. However, the risk of dividing volume between different segments is known to regulators worldwide, potentially detracting from important market objectives.
The move may be welcomed retail investors who make up over 35% of daily trading activity on the exchanges, as it could lead to quicker fund transfers and share receipts. However, it poses a significant challenge for Foreign Portfolio Investors and institutional investors, given the complex nature of their transactions.
In summary, the potential shift to same-day settlement is expected to ignite a battle between institutional complexity, technology, and the speed of such a move, pitting the needs of retailers and institutions against each other.