SEBI’s T+1 move to add to stock market frenzy

India’s stock market euphoria got one more booster dose, but this time the adrenaline rush was not injected by retail or institutional investors but the market regulator Securities and Exchange Board of India (SEBI).

Through a circular, SEBI has shortened the settlement cycle (time taken between selling shares and receiving cash or buying shares and receiving Demat shares). It has allowed stock exchanges to offer T+1 (trading day plus one day) instead of the traditional T+2 settlement cycle, making the regulator the world’s first watchdog to implement such a rule.

SEBI came out with the circular of shortening settlement cycle when India is witnessing a record first-time retail participation in the market and the country is in grip of a trading frenzy. Let’s understand the process of settlement and how T+1 may add fuel to the speculative fire.

When you buy or sell a share there are two key days. The day when you order trade is known as T. The second key day is the settlement day when the buyer gets the share while the seller gets the money. Currently, it takes 2 business days for the money to be transferred to the seller—and the buyer getting the shares. This is called T+2 settlement. If stock exchanges opt for T+1 settlement then this process will be settled in just one business day.

As per SEBI circular, a stock exchange may choose to offer T+1 settlement cycle on any of the scrips, after giving advance notice of at least one month regarding a change in the settlement cycle, to all stakeholders, including the public at large by disseminating the same on its website.

Investors commended the move as it would provide them liquid funds sooner than earlier. “Investors will have faster liquid funds in hand against their sold securities and he can decide on further investments,” says Anupam Agal, head of operations, broking and distribution, Motilal Oswal Financial Services (MOSL).

However, some exchange veterans feel that this will bring in more volatility and speculation at a time when the market is already showing signs of a bubble. Already Indian stock exchanges are witnessing massive daily trades.

On September 9, future and options turnover on National Stock Exchange crossed ₹98 lakh crore while the cash segment witnessed ₹49,773 crores worth of transactions. Fortune India earlier reported how in a few days the retail trading frenzy is taking future and options traded volume well past the eye-popping ₹100 lakh crore mark. Following the lockdown due to the Covid-19 outbreak last year, brokerages have reported a significant jump in opening of new accounts.

An exchange veteran on condition of anonymity says the SEBI’s move is a good step but it came at the wrong time. “Today over a million new retail investors are entering into equity market every month. Shortening of settlement cycle will enhance liquidity in the hands of immature investors who are going to speculate more and more,” he adds.

Agal from MOSL says the number of transactions in the market may go up and this may result in more deliverable volumes, but he still calls the move positive.

Retail investors may or may not be at the receiving end but there are a few winners for sure. Stock exchanges are one for sure who are going to collect more fees. Stockbrokers are always winners in trading frenzy as their bread and butter depend on the volume of trades.