T+1 settlement system proposed by SEBI: How will it benefit you?

The proposal to shorten the settlement cycle to T+1 is the most ideal one to mitigate the overall risks in the trading system. With the banking system having taken giant strides in technology, this should help in introducing much faster settlement system in the capital market without any hassles whatsoever

The Securities and Exchange Board of India (SEBI) has put up a discussion paper on the subject of “Risk Management—Safer Markets for Investors” and has invited comments and suggestions from stakeholders on the following three proposals arising out of the need to improve the functioning of the capital markets in our country.

  1. Incentivising internet based trading models posing minimal risk.
  2. Mitigation of risk to client collateral.
  3. T+1 settlement cycle as a measure to reduce overall risk in the system.

Almost two years back it was in Moneylife that I had suggested the need for introduction of T+1 settlement cycle in the place of the present T+2 settlement system with a view to give a boost to the capital market in our country.    

Read: How the T+2 rolling settlement in the equity market is subverted to benefit the intermediaries?

The fact that SEBI has now proposed to consider implementation of T+1 settlement system augurs well not only for the investors, but for all the players in the market, and to the economy of the country as well.  For the benefit of those who are not abreast with the settlement system followed at present, here is a brief account of the time-frame for settlement of trades followed by the stock exchanges.

What is the present settlement system?

At present stock exchanges follow T+2 rolling settlement systems for completion of the trades done on a day-to-day basis. For example, if you place an order through your broker to buy a share from BSE or NSE on Monday, and if your order is executed on the same day, the settlement of the trade takes place in two working days thereafter. That is, trading day plus two working days, or T+2.  In the instant case, trade executed on Monday gets settled on Wednesday which means the broker who handles your transaction receives payment for the shares sold on your behalf or gets shares which are bought for you on Wednesday and the broker in turn passes on the money or the shares, as the case may be, to your account latest by Thursday, the next working day. In effect, the Trade+2 days are followed up to the broker, and the investors normally get the payment or shares, as the case may be, within Trade+3 days under the present system. 

This system is followed in the case of automated trading done in the Internet based trading platform under the 3-in-1 account model, i.e. a bank account, a Dmat account and a broking account linked to each other for trading purposes.

Even when you are dealing with a broker on a manual basis, this time-frame of T+2 is followed up to the broker. Thereafter, how fast you will get your money depends on whether the broker pays you by means of a cheque or through NEFT as per the system followed by each broker and the arrangement you have agreed with him.  

What is the T+1 settlement system and how will it benefit you?

SEBI now proposes to go one step further and intends to complete the settlement on Trade +1 day (T+1), which means, trades executed on Monday gets settled on Tuesday, the next working day, This will help in saving a day for every investor as he gets his money credited to his account a day earlier or he gets his shares in his Dmat account a day earlier than at present. This shortening of the settlement cycle is expected to benefit a large number of people in different ways as under:

1. The most important benefit of this shortening of the settlement cycle is that it reduces the risk of non-payment or non-delivery of shares by the broker by one day, which is an improvement over the present system. In a world full of uncertainties, and where the total amount transacted is huge, even a day counts, and speeding up the settlement process will certainly reduce the risk of default in the stock market.

2. This will provide liquidity to the investors as they get their funds for the shares sold/ credited to their account a day earlier. The investors will have the benefit of profitably deploying their cash for a day more, either to buy shares or otherwise. The real advantage of such an early settlement can be experienced in a volatile market, as it can help in efficient use of capital and resultant benefits to the investors.

3. Under the new system the investors will get the shares purchased by them credited to their Dmat account also a day earlier. This will enable them to sell the shares purchased, if they wish, immediately on the next day, which may help them to protect their profits on the transactions.

4. With the additional liquidity provided by the improved system, there is every possibility of investors undertaking more transactions in the stock market, which will benefit the brokers as well, as they too will earn more through higher turnover.

5. With increased turnover possible through quicker settlements, all the participants in the market—stock exchanges, depositories, depository participants, and even the government—will stand to benefit by increased fees and taxes, etc.

In short, this proposal of T+1 settlement cycle will be a boon to the investors, brokers and all those involved in the stock market, as it should help in improving the overall sentiment for the benefit of all the stakeholders in the capital market.

Now that SEBI has invited suggestions before its implementation, here are a few suggestions on all the three proposals for consideration of SEBI in the interest of all the stake holders and for its successful implementation as early as possible.  

  1. Incentivising internet based trading model (IBT):

The IBT model is the safest mode of dealing in the stock market as the funds and securities of investors are clearly earmarked in their respective bank accounts or in their Dmat accounts, with virtually zero risk to the broker. And this zero risk requires to be carried forward to the Clearing Corporation (CC), as well through a well-knit tripartite agreement between the bank, broker and the Clearing Corporation, which should be able to access the earmarked funds or the securities, as the case may be, in the event of the failure of the broker for whatever reasons to deliver. When this fool-proof system is put in place, the entire capital market operations carried through the IBT model will be risk-free for all the market intermediaries involved in the transaction.  

As of now, the IBT model of dealing in stock market is a bit expensive system for the investors, as most of the institutions, which maintain three-in-one account, charge much higher level of brokerage than the ordinary brokers who operate manually with the investors. This is because of the early mover advantage they enjoyed and most of the investors are stuck with them and pay a higher brokerage not out of choice but because of the procedural hassles involved in shifting from one bank to another. In view of the risk-free nature of the IBT based model; SEBI has rightly thought of incentivizing the investors, which should encourage more investors to join this system, which is investor friendly, market friendly and eco-friendly too.

To bring down the cost to the investor, it is necessary to offer all the proposed incentives suggested in the discussion paper, namely, waiver of margin requirement by CC and levying lower clearing charges by the CC for every trade executed through the system. However, to pass on this benefit to the investors, it is desirable that SEBI stipulates a cap on brokerage and other charges levied by these banks which offer the IBT model of service. If their charges are the lowest, particularly lower than that levied by the non-institutional brokers, it will be one of the biggest incentives for retail investors to move over to this model of dealing in the stock market. 

  1. Mitigation of risk to client collateral:

In all fairness to the investors as well as the brokers, the client collateral should vest directly with the Clearing Corporation, which should be the focal point for safety of the client collateral in the event of the clearing member/trading member’s failure to honour his obligations to the Clearing Corporation.  There is no point in bringing in an additional intermediary of a professional clearing member to hold the baby of collateral provided by the clients, as too many cooks can spoil the broth. The Model B suggested in the discussion paper should be adopted as it is not only cost effective but also most suitable under the circumstances.

  1. T+1 settlement cycle as a measure to reduce overall risk in the system:

The proposal to shorten the settlement cycle to T+1 is the most ideal one to mitigate the overall risks in the trading system. With the banking system having taken giant strides in successfully introducing core banking solutions in all their outlets and putting in place real time gross settlement system (RTGS) for transfer of funds, it is much simpler and feasible to transfer funds from one place to another in a matter of few minutes, and this should help in introducing much faster settlement system in the capital market without any hassles whatsoever.

What SEBI should ensure is that the T+ 1 settlement system reaches the ultimate investor, which unfortunately is not happening in today’s settlement system. At present the settlement system stops at the broker, who takes another day to settle the payments to the investor, thereby extending the settlement risk by one more day even in the automated Internet based trading model. SEBI should guard against subverting the system by delaying the actual settlement beyond T+1 so that the real benefit of the capital market reform reaches the well deserved beneficiary, the common investor.

The pay-out of sale proceeds to the credit of the investor should be done on the day of settlement itself. Similarly, the shares purchased should also be credited to the Dmat account of the buyer on the settlement day itself, even at late hours, so that the investor is put in funds and or securities on the settlement day itself. If SEBI can ensure that this is achieved in the proposed T+1 system, it will veritably serve the objective of mitigating the overall risk to a large extent. The real benefits of the proposed move will certainly be much more than the cost of modifications to the existing trading and settlement systems and it should undoubtedly help in deepening the capital market.

 Let us therefore, give big thumbs up to the proposal and hope that it will be implemented early. It is time for SEBI to say “on your mark, get set, go. Your time starts now” to all the stock exchanges in the country for an early start of the T+1 settlement system which should usher in a new era of security, liquidity and convenience for all the players in the capital market of our country.

(The author is financial analyst and writes for Moneylife under the pen-name ‘Gurpur’)

1 decade ago
Good Points Mr. Gurpur!! Couldn't agree more.

By the way, isn't the 3rd point valid in T+2 settlement as well? You can sell the shares instantly or the next day?
Dayananda Kamath k
1 decade ago
it is a conspiracy to drive out small and retail investors from the stock market so that fii s can manipulate the markets at their wish. it is just like driving out mutual fund investors from mutual fund by reducing the commission.which was projected as reducing cost to the mutual fund investors. nobody knows how secure the technology is. you must remember that the person who invented this online payment has never used the system during his life time, because he knew the risks. in india without proper systems govt and regulator sponsored cumpulsary shifting to online method is very dangerous and invitation for scams, frauds.
1 decade ago
I find that Mr. Joshi and Mr. Hemant have raised certain pertinent and important issues which I would like to clarify as under:

As per my information, a number of brokers today collect money in advance from their clients, as brokers do not wish to take any risk of non-payment after the trade is done. However, a few brokers do accept cheques from their customers after the deal is done,depending upon their relationship with their customers.

Under the new system also, there is a possibility of your making payment to the broker after the trade is done, i.e. next day morning by your cheque which can be credited to his account instantly, if your account and the broker's account are in the same bank, but need not be in the same branch. This is because, under the core banking technology used by all banks, in their own words, you are a customer of the bank and not of the branch, which means that one branch of a bank can credit or debit account of any customer of any other branch of the same bank anywhere in the country. The only requirement is that both the accounts must be in the same bank's branches, but can be in different places.

I understand some banks do not levy any charge for such a facility, but some others do charge, because RBI is yet to come out with guidelines in this regard.

The problem arises, if the bank where the broker maintains his account does not have a branch in your place, in which case, you need to send the amount through RTGS or NEFT, which also gets credited on the same day, if sent early monrning, and give proof of such remittance to your broker.

This is, however, not free at present, but there is a case for making this service also free, which is in the domain of RBI.

In fact these are problems for SEBI and RBI to sort out and I am sure they are not insurmountable and SEBI will have to consider all these issues before introducing the new system.

Now that SEBI has invited feedback and comments from the public, I would suggest that if any body has any reservations about the proposal, please give your feedback and pose your problems to SEBI through their feed back e-mail id: [email protected] or by mail to The Deputy General Manager, Market Regulation Dept., Division of Risk Management & New Products, SEBI, C4 -A, G - Block, Bandra Kurla Complex, Mumbai -400051 before 20th May, 2013.

The entire discussion paper is available on the SEBI website and please do give your feed back to them before the due date for their consideration and arriving at a fair decision in this matter.

I am sure, SEBI will have to solve all the problems faced by small or big investors before introducing the new system, otherwise it will not be successful.

1 decade ago
Sure itbe a cut to INFLATION and un organiesd targets.
1 decade ago
Why try to fix something that ain't broke? (and is working just fine).

The buyer's funds can get blocked for a very long time. Because buying illiquid shares now, is even more difficult than taking away bone from a dog's mouth.
1 decade ago
It seems that writer is unaware of ground realities & thinks that there are only sellers in the market. So called banking systems giant strides in technology, we still not get credit for cheques deposited till third day .NEFT/RTGS comes with charges & everyone is not net savvy, so visit to bank will increase for transferring the amount to broker by way of NEFT/RTGS. Further regarding pay-out of shares, i always get my shares directly from exchange on pay-out day only. Even now people are allowed to sell shares ,next day of purchase. Only risk is of short delivery, which investor have to bear. As per new system suggested, buyer will have to pay T-1 (i.e one day before he/she purchase), so that broker has money, to pay -in the market .Hence I feel that, till we rectify the problems of banking system ,no point in advocating T+1 in the market .
1 decade ago
It is pathetic to introduce the T+1 system. The writer has written only one side of the settlement system. only pay-out is not there buddy you must think and write about pay-in also. Have you consider pay-in ?
arun adalja
1 decade ago
no doubt it is a good system but in a practical way it is difficult and may create a problem to small investor who does not have internet facility.in this case one has to carry signed delivery instruction book with him and visit to dp will increase and also carry cheque book with him when he goes to work.why so much hurry?we do not have trust on share market so everything done hurriedly.
Vinay Joshi
1 decade ago
Dear Mr.Gurupur,

Is it not a good step in risk management?

I'll discuss it with you.

Exemplary that SEBI invites public comments to the proposal. The risk management committee comprises academics & Indian, FII brokerages rep's, exchanges, clearing corpn's. [is in not in line with FSCLR?]

Will it not be an improvement where 100% is blocked in designated a/c before entering trade? Brokerages pay upfront margins. Send your feedback to SEBI to lift this restriction.
But in the event the brokerage defaulting, an operational mechanism to be in place. SEBI is proposing to incentivize investors who pose no risk in the system. You call it IBT model.

Now coming to SEBI proposal as narrated by you is complicated.

T+1 is easier said than done.
What about overseas investors & those based in smaller towns/cities? How will they meet the deadline for pay in funds or securities?

Many foreign regulators are also working on these lines to protect client assets.
A major proposal SEBI is contemplating to segregate clients assets.

No regulations can absolve all risks. [Indian equity derivative is diff.]Client proceeds should not be used by a defaulting member.

It is pertinent to send a petition to SEBI which has proposed such good measures & is open for comments before finalization.

SEBI, will definitely consider points raised by stalwarts like Ms.Sucheta, your good self,my friend Mobis etc; it can't overlook.

However the regulator has to ensure that any steps it takes does not lead to unintended consequences.


Anil Agashe
1 decade ago
A most welcome move by SEBI. Must be supported whole heartedly by all. The day is not far when trade and payments may happen real time!
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