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SEBI to Implement T+2 Bonus Share Trading from October 1

The Securities and Exchange Board of India, the respected stock market regulatory body behind the securities market in India, once again displays its keen commitment to upgrading market mechanisms for betterment.

In a move that would impact both companies and investors, SEBI declared the introduction of a T+2 bonus share trading Framework from October 1, 2024, onward. This reform forms part of SEBI’s continued drive to bring efficiency, increase liquidity, and enhance transparency in the Indian stock market.

The bonus shares are expected to be issued in line with the T+2 mechanism, enabling better and more effective control over the credit trading of bonus shares. It also promises that the new system will eliminate any inefficiency inherent in the previous models, thereby accelerating processing periods and reducing administrative burdens for companies and market intermediaries.

By extension, investors can benefit from having their bonus shares returned faster, which gives them the flexibility of trading shares immediately. This blog will examine SEBI’s new framework’s significant changes, its benefits on investors and companies, and its overall impact on the Indian securities market.

Understanding about Bonus Shares

One should know what bonus shares are and how they work in a market. Bonus shares are additional shares a company allots to its existing shareholders, usually in proportion to the number of shares they hold. These shares are issued free of cost and deemed rewarding; therefore, they are considered a way companies can attempt to increase the shareholder’s wealth without paying cash dividends.

Historically, the crediting and trading of bonus shares have been significantly delayed. Under the old system, shareholders often had to wait several days or weeks for the bonus shares to be credited into their accounts and become tradable. Such delays led to inefficiencies and missed trading opportunities.

Problems Faced in the Current System

In the current system, the bonus shares are credited to the investors’ demat accounts well after the record date, which is the cutoff date set by a company to determine which shareholders are eligible under the bonus issue. Beyond this date, the shares are often delayed before being credited, which may extend to many weeks.

The delay is mainly due to the procedural complexities, administrative approvals, and other internal mechanisms between companies, stock exchanges, and depositories.

Moreover, many companies declare the issuance of bonus shares under a temporary ISIN, further complicating trading. This also greatly increases the administrative work for companies and exchanges to consolidate that temporary ISIN later with the main ISIN for regular trading. These delays and inefficiencies frustrate not only investors but also affect market liquidity.

The bonus shares, which are not immediately tradable, are essentially “locked” assets wherein, during the interim period, the investor cannot access or wilfully enjoy the same. SEBI’s decision to introduce a T+2 Bonus Share Trading Framework is designed with these concerns in mind and simplifies the process.

Let’s Understand about T+2

T+2 is the cycle for settling transactions, concluding two working days after the trade is executed. In the context of bonus shares, T+2 guarantees that the shareholders will most definitely get their bonus shares two days after the record date, which is considered an improvement over the previous system. Reducing the settlement period lets investors start trading their new bonus shares sooner and improves overall market liquidity.

Key Changes Brought by the New Framework of SEBI

The new SEBI framework brought some significant changes to the trading process of bonus shares. The system will be simplified, and the time between record dates will decrease, making trading bonus shares possible.

· In-Principles Approval Requirement

Under the new guidelines, companies must approach the stock exchange for an in-principles approval within five working days following a bonus issue approved by the board of directors. This ensures that the bonus issue is taken up early so that it will be followed up with the allotment of shares without much delay. This would overcome procedural delays that have generally delayed the crediting of bonus shares.

· Deemed Date of Allotment

SEBI also introduced that there would be a “deemed date of allotment,” which falls on the day after the record date. Stock exchanges would issue a notification as to the number of bonus shares issued and the allotment date on this date. This new provision will ensure that the allotment process will be initiated promptly following the record date, reducing investors’ uncertainty and crediting bonus shares.

· Timeline for Document Submissions

To ensure that the bonus shares are credited in time, companies must submit all documents relating to deposition with depositories by noon from the record date onwards on the next working day. This streamlined documentation process eliminates the delays often caused by administrative holdups and will further speed up crediting bonus shares to the shareholders’ accounts.

· Repudiation of Temporary ISINs

The most notable change in SEBI’s new framework is the elimination of temporary ISINs for bonus shares. Under the new framework, bonus shares shall be credited under the same ISIN as those representing equity shares of the company in existence. This eliminates temporary trading complications, apart from the need to consolidate the temporary and permanent ISINs later, thereby cutting administrative overheads and delays.

· Penalty for Non-Compliance

SEBI has also introduced penalties for companies that fail to comply with the revised or updated timelines. These penalties would be enforceable per SEBI’s existing regulations, including the Issue of Capital and Disclosure Requirements (ICDR) Regulations. An accountability mechanism like this would ensure companies take this new timeline seriously when crediting bonus shares on time.

Benefits to the Investors Under T+2 Bonus Share Trading Framework

The following are some of the key advantages that a T+2 bonus share trading framework is likely to provide to an investor:

· Faster access to Bonus Shares

The reduced settlement period means that investors will quickly take away the bonus shares and may have the opportunity to trade them right after the record date.

· Better Market Liquidity

The new regime will likely raise overall market liquidity by reducing the days bonus shares are unavailable for trading. This increase in liquidity could lead to narrower bid-ask spreads and more efficient price discovery.

· Smoothening of the Trading Process

Without temporary ISINs, investors would not have to deal with the headache of dealing with multiple ISINs while trading, making the process simpler and less confusing.

· Increased Investor Confidence

The reduced settlement period and smooth processes will likely instil investor confidence in the market. Investors will be assured of obtaining their bonus shares more promptly, encouraging greater participation in the securities market.

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Impact on Companies and Market Participants

While transitioning to a T+2 bonus share trading framework brings more advantages to the companies, it also requires them to tune their internal processes and procedures. Key implications of this transition include the following:

· Reduced Administrative Burden

The new framework simplifies issuing bonus shares by eliminating the need for temporary ISINs and documentation work. This will help companies streamline operations and avoid delays that may attract penalties.

· New timelines

Companies should be prepared to comply with the new stricter timelines for document submission and allotment notifications. This might shift internal jobs, but it eventually will pay dividends efficiently.

· Penalties for Non-Compliance

SEBI’s step regarding penalties for non-compliance will motivate companies to strive toward timely submissions and adhere to the new guidelines. Failure to do so may invite financial penalties and damage to one’s reputation.

Impact on the Impact on Market Liquidity and Efficiency

One of the primary goals of the new framework issued by SEBI is increasing the efficiency of the market or its liquidity. A shorter duration necessary for the crediting and trading availability of the bonus shares will facilitate the T+2 bonus share trading so that investors can get faster access to the entitled bonus shares and make use of market opportunities more quickly.

This, in turn, is likely to promote the liquidity of the market and enhance the possibility for investors to buy and sell shares closer to a fair price.

The new framework is also expected to improve price discovery because bonus shares will soon be tradable, and market participants will respond promptly to increased supply and/or demand. Such efficiency could lead to improved securities pricing and, therefore, might benefit investors and the market.

Conclusion

The introduction of the T+2 bonus share trading framework is a landmark decision by SEBI in accord with modernizing India’s securities market. The new framework is expected to increase market liquidity, improve investor confidence in securities market dealings, and reduce administrative burdens on companies by facilitating efficient crediting and trading of bonus shares.

This move by SEBI, as the Indian stock market promises to improve, indicates its commitment to achieving a more efficient and transparent investor-friendly market environment.

The introduction of the T+2 regime, starting on October 1, 2024, will have positive, wide-ranging implications for companies and investors. While some initial hardships may arise regarding system readiness and compliance, the long-term benefits of a quicker and more effective bonus share trading process would adequately compensate for these.

This T+2 bonus share trading framework represents one of the key examples of proactive functionality being feasibly introduced by SEBI to incrementally enhance the operation of the Indian securities market.

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