Yesterday, SEBI chairman Madhabi Puri Buch's press conference was very important in terms of announcements, in contrast to the heightened market and the introduction of new settlement timing. The regulator plans to start the T+0 trade cycle settlements on an optional basis later this month, on March 28. This would mean settlements on the same day, ensuring trades are settled immediately. Currently, the Indian stock market operates on a T+1 settlement cycle across all scrips. SEBI wants the T+0 settlement norm to be in place from March-end 2024 and the T+ instantaneous settlement 12 months from then.
The T+0 settlements will be implemented in phases. In Phase 1, an optional T+0 cycle will be implemented for trades taken until 1:30 pm, followed by the settlement of funds and securities by 4:30 pm. In Phase 2, an optional instantaneous trade-to-trade settlement will be implemented for both funds and securities until 3:30 p.m. After Phase 2, Phase 1 of optional T+0 will be discontinued.
The merits of a shorter trade settlement cycle include reducing counterparty risk, increasing market efficiency, and aligning with international standards. Shortening the settlement cycle can also reduce operational costs for market participants, such as clearing and settlement expenses, collateral requirements, and funding costs associated with longer settlement periods. It will also allow regulatory bodies to monitor market activities more effectively, detect risks in a timely manner, and implement appropriate measures to maintain market integrity.
However, T+0's demerits include changes to market infrastructure, systems, and processes, which can be complex and costly to implement. It may impose liquidity constraints on market participants, particularly smaller investors and firms, who need to manage their cash flows more efficiently to meet tighter settlement deadlines. A shorter settlement cycle can also amplify market volatility, especially during periods of high trading activity.
SEBI Chairperson Madhabhi Puri Buch also raised red flags on the SME and Midcap indices, which have been the star performers in recent times. SEBI has emphasized the importance of addressing the heightened activity in the grey market pre-IPO, which she calls a "pechida" (complicated) problem. The Act allows for both listed and to-be-listed companies, but the term "to be listed" means a company should have formally started a process to get itself listed. Buch believes that this delicate space requires consultation before proceeding.
The increasing number of IPOs has led to promoters and private investors exploiting the gray market to drive up prices, justifying higher base case prices for price issues. Gray market prices become the anchor around which issues are priced, with investors taking cues from the unlisted market to determine the demand and listing gain of a public issue. This is seen as driving the overpricing of issues.
Earlier, the regulator urged trustees of mutual funds to formulate policies suitable to protect investors from any kind of risk in the small- and mid-cap space. The market regulator is trying to stop a bubble from building in the segment by flagging the surging interest in the segment as an area of concern. Buch said that the capital market regulator will not mandate mutual funds to stop new flows into fund schemes or take any such steps without floating a consultation paper, but it is nudging trustees of mutual funds to take steps to protect investor interest as there is a general feeling that there is forth in certain segments of the market.
The regulator wants the trustees to ensure proactive measures are taken by AMCs and fund managers towards moderating inflows and portfolio rebalancing, and steps are taken to ensure investors are protected from the first-mover advantage of redeeming investors. From March 15, small- and mid-cap funds will have to disclose stress- tests in the prescribed format on the AMFI website. This disclosure will help investors understand how many days the funds would take to exit their underlying portfolio in an adverse environment, that is, if they were to face "significant redemptions."
