T+0 Settlement: A Big Leap for Indian Markets

The SEBI has taken the expansion of the T+0 settlement mechanism from a mere 25 stocks to 500 stocks. It has allowed sellers to get 100% amount the very day, which is indeed a big leap out from the earlier T+1 cycle where only 80% of the amount was settled on an instant basis. The beta version has seen uptake but is still limited, but market players believe that T+0 is just around the corner, and they do so on liquidity concerns by brokers. It will increase liquidity and boost confidence among investors.

T+0 Settlement Expansion: A Game Changer for Indian Markets

Among the encouraging developments that will further change the Indian stock market landscape is the broadening of T+0 settlement mechanism to a larger number of stocks. Available only for the stocks of 25 leading companies till date, this system has expanded for its reach to 500 stocks bringing in a new era of quicker settlements and better liquidity in the market. T+0 or “trading plus zero days” allows settlement to occur on the same day as the trade execution. Then, from the sellers’ perspective, it means direct access on settlement day to cash.

So far, adoption is slow but market participants are not uniform in their opinion. While some benefits it offers have been realized, most of the brokers are still afraid to fully adopt the T+0 cycle of settlement. Experts believe that this will only be a matter of time before a more significant section of the population accepts this mechanism.

Understanding the T+0 Settlement Mechanism

It is a settlement cycle wherein the stock transactions settle on the same day of the trade. The typical market cycle, for most part, is T+1 or even T+2, meaning one or two days pass before the funds and securities fully change hands with the buyer and seller. On the other hand, a T+0 makes available sellers with 100% from the very next minute while a T+1 cycle allows buyers only an 80% access to all funds on the same day with the balance reconciled the following day.

This fast settlement process has its obvious advantage. It is particularly welcome in an unstable market, where traders and investors can settle their liquidations faster and minimize the time their money is exposed to risks posed by the market. However, there are challenges to this. Proven so far is the mixed reception T+0 has received.

The T+0 settlement mechanism that has been rolled out in March 2024 has met a lukewarm response so far. Data made available by NSE reveals that Geojit Financial Services was the solitary broker that participated consecutively for 24 weeks of straight weeks in T+0 settlements. All other top-brokers participating sporadically, no one had more than six weeks of participation in T+0 trading.

Liquidity concerns have also been part of limited participation, as the number of stocks available for T+0 trading was restricted at the beginning. “The initiative is excellent, but rollout has been handicapped by the low number of scrips available for trading under the T+0 window in the early days,” says Executive Director at YES Securities Amar Ambani. Ambani also underlines the more significant participation system and especially from major institutional clients and custodians as the necessary requirement to make the system take off.

Why Liquidity Is a Concern?

Liquidity is the lifeblood of any stock market and turns out to be one of the reasons why there hasn’t been a much greater uptake for T+0. According to Gaurav Dua, Sr VP and Head of Capital Market Strategy at Sharekhan, “The brokers are not going to get into complete confabulation with the T+0 system until these liquidity issues are appropriately addressed.”.

Without adequate liquidity, large orders may be traded without bringing much impact in prices, thus bringing much volatility in the market and relatively less attraction for institutional investors’ participation. The institutional investors, on their part, normally require deep liquidity in executing huge trades to avoid discrepancies in prices.

Advantages of T+0 Settlement to Retail Investors

Indeed, although many brokers were initially hesitant toward the introduction of T+0, it is one settlement mechanism that holds quite a lot of promise to the retail investor since it is most likely to reduce the settlement cycle time, thus making investors able to reinvest or withdraw their capital much faster.

According to Aurelia Menezes, Partner at King Stubb & Kasiva, T+0 may benefit investors looking to preserve liquidity in volatile market conditions. For investors, any access to liquidity is gold in a volatile market because it presents the opportunity of taking advantage of new opportunities or getting out before things worsen.

It further limits the risk of the settlement process itself even further. The traditional T+1 or T+2 cycles risk that the price of a given stock may vary considerably between the two days of a trade and settlement, causing settlement failures or disputes. Because the settlement occurs on the same day as the trade, in T+0, this risk is wiped away to the greatest extent possible.

Institutional Adoption Key

To become an adopted norm, the T+0 settlement mechanism needs to get institutional investors on board. Institutional players are presently driving most of the trading volume in Indian markets, and their participation is crucial for any new mechanism to gain mileage. Shrey Jain, Founder and CEO, SAS Online said that while T+0 may benefit the investor with facilities like instant payout, institutional participation in large numbers is required to scale the system properly.

Massive trade settlement with T+0 will require enormous support services, custodians, and back-office systems. Those systems also need to be integrated so that settlement can occur. According to Ambani, getting those systems in place and having the best brokerages participate will be some of the key steps to the true opening of the T+0 potential.

The Future of T+0 Settlements

There has been slow adoption of T+0 settlement, but optimism runs high for the system eventually catching on. Expanding T+0 to 500 stocks is an important step forward, not only because it widens the possibilities for the traders but also because of increased liquidity in the market.

The case for T+0 is evident: the smoother the settlement, the lower the settlement risk, and the better the liquidity. Its success, though, will be in the hands of brokers, institutional investors, and now retail traders. Indeed, there are still some liquidity and system infrastructures left to be addressed; however, it is along the long term when all the benefits of T+0 will prevail. It will change the Indian stock market positively by radically reducing settlement risk and radically improving liquidity.

Conclusion

The T+0 settlement mechanism is in fact a giant step in the development of the Indian stock market. Although its introduction has been slow, at least the benefits it promises-faster availability of fund and minimized settlement risks-make a prominent appeal to both the retail and the institutional investors. Given the move by SEBI to increase the number of stocks available for T+0 trading, it will just be a matter of time before the system becomes fully accepted.

Disclaimer:

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