One-Hour Trade Settlement

• 07 Sep 2023

For Prelims: One-Hour Trade Settlement, Securities and Exchange Board of India, Application Supported by Blocked Amount (ASBA), Instantaneous Trade Settlement.

For Mains: Benefits of One-Hour Trade Settlement.

Source: TH

Why in News?

Recently, the Securities and Exchange Board of India (SEBI) has announced that it is aiming to launch One-Hour Settlement of trades by March 2024 in order to enhance the efficiency of trade settlement processes.

• The SEBI will launch Application Supported by Blocked Amount (ASBA)-like facility for trading in the Secondary Market by January 2024.

What is Application Supported by Blocked Amount (ASBA)?

• ASBA is a mechanism introduced by the SEBI to facilitate the application and allotment process for Initial Public Offerings (IPOs), rights issues, and other securities offerings.
• ASBA is designed to make the application process more efficient and investor-friendly by allowing investors to apply for shares without transferring the entire application amount upfront.
• It entails that the amount to be paid for subscribing the shares does not get debited from the investor’s account until the shares have been allotted by the company.

What is the Trade Settlement?

• About:
  • Trade settlement is a critical process in the financial markets that involves the transfer of funds and securities between parties involved in a trade.
  • It ensures that the buyer receives the purchased securities, and the seller receives the agreed-upon funds.
  • In the context of securities trading, this settlement process finalizes the transaction.
• T+1 Settlement Cycle:
  • In January 2023, India adopted the T+1 settlement cycle, where T represents the trade date.
  • This means that trade-related settlements occur within one business day or 24 hours of the actual transaction.
  • India became the second country, after China, to implement the T+1 settlement cycle in top-listed securities.
  • This transition brought several advantages, including increased operational efficiency, faster fund transfers, prompt share delivery, and improved convenience for participants in the stock market.

What is SEBI’s New Plan for Real Time Trade Settlement?

• One-Hour Trade Settlement:
  • Under this scheme, when an investor sells a share, the money from the sale will be credited to their account within one hour, and the buyer will receive the purchased shares in their demat account within the same time frame.
  • This represents a significant reduction in settlement time compared to the existing T+1 cycle.
• Instantaneous Trade Settlement:
  • SEBI acknowledges that achieving instantaneous settlement is a more intricate task, requiring additional technology development.
  • Therefore, they plan to focus on implementing one-hour trade settlement first and then proceed towards instantaneous settlement.
    • The timeframe for launching instantaneous settlement is projected to be by the end of 2024.

What are the Benefits of One-Hour Trade Settlement?

• Faster Transactions:
  • Investors will experience significantly reduced settlement times, enabling quicker access to funds and securities.
• Enhanced Liquidity:
  • Quicker settlement can lead to improved market liquidity as funds become available for reinvestment sooner.
• Risk Reduction:
  • Reducing the settlement time can mitigate counterparty and market risk, enhancing overall market stability.
• Investor Convenience:
  • Investors will appreciate the swifter access to their funds and securities, making the market more user-friendly.