Mint Explainer: Can instant shares settlements coexist with the T+1 cycle?

livemint.com:

Mint takes a look into the mechanism, and potential risks. Currently in India, buyers and sellers of shares receive their respective proceeds a day after a transaction is completed–a transaction Day (T) + 1 settlement cycle. Sebi has proposed a mechanism in which a market entity can receive the proceeds instantly after an order is executed.

The process will be implemented in two phases. In phase 1 market participants will be offered T+0 settlement, which means investors will receive their payouts by the end of the same trading session. In phase 2, the settlement time will be instantaneous.

To be sure, the existing T+1 settlement cycle will continue, and instant settlement will be optional. Investors who are comfortable with the existing settlement system can continue to trade on the T+1 settlement cycle. The proposed framework will benefit retail investors who make delivery-based trades because they will be able to receive proceeds instantaneously.

For sellers of shares, it would be helpful since they would be able to receive payout of funds immediately, which will allow them to reinvest their funds in the market quicker. For buyers, receiving the shares immediately will allow them to pledge the shares for further trading. The settlement also improves risk management in the market by clearing corporations since the trades in instant settlement are backed by upfront funds and securities.

While a shorter settlement system can be extremely beneficial for domestic investors, foreign funds face certain challenges in shifting completely to it. This is because offshore funds operate across different time zones and make investments through custodians. Also, for making a trade, foreign funds will need to book foreign exchange