T+0 Settlement: One More Step Towards Global Standards

T+0 settlement to soon integrate into the Indian equity regime, Securities and Exchange Board of India (Sebi) chairperson, Madhabi Puri Buch said that the instant settlement mechanism will be implemented on an optional basis from 28 March. 

Optional basis means T+0 settlement will not mandatory as of now so the clients may choose to opt for T+0 settlement cycle or stay with T+1. In Phase 1, T+0 settlement will be available only for the trades done till 1.30 pm and in Phase 2 all trades done till 3.30 pm will be eligible for instantaneous settlement. Initially, T+0 settlements will be available for top 500 listed equity shares based on market capitalisation and it will be done in three tranches of 200, 200, and 100, starting from the lowest to highest market cap.

A T+0 settlement would ensure the trade settlement on the same day. Hitherto, the Indian stock market follows the T+1 settlement which settles the trades on a subsequent day. Additionally, it is expected to enable the investors to receive the delivery of purchased equities on the same day. 

“The initiative, aimed at aligning with global financial market standards, is under exploration and holds the promise of bringing about instantaneous trade settlements. Such a transition is believed to offer numerous benefits, notably in the reduction of counterparty risk and the bolstering of market efficiency through the swift exchange of funds and securities between buyers and sellers. Furthermore, it is anticipated to substantially lower operational expenses for market participants and reduce the funding costs that brokers face,” said CA Rakeshh Mehta, Chairman, Mehta Group-Mehta Equities.

The settlement cycle, in the Indian stock market, evolved from T+5 to T+3 in 2002 and subsequently to T+2 in 2003. The T+1 settlement regime was introduced in 2021 by Sebi which became fully operational in January 2023. The regulatory intervention for T+0 settlement is believed to enhance the liquidity and participation of retail investors in the equity markets. The quicker settlement allures the investors to park their funds in the form of equities and withdraw them according to their needs.

“Moving from T+5 to T+3 settlement cycle and then further to T+2 in 2003 resulted in reduced systemic and operational risk, increased liquidity due to quicker access to funds, lower counterparty exposure and reduction in margin and collateral requirements. Two decades later the move from T+2 to T+1 helped India becoming the first market in the world to implement T+1 across all segments while in China only selected segments were settled on T+1,” said Mohit Mital, Director of Investment Research, Acuity Knowledge Partners.

Mehta highlighted the various challenges associated with the T+0 settlement and said, that implementing this change would necessitate a comprehensive overhaul of the current market infrastructure, systems and processes, entailing complex and potentially costly modifications to be made promptly. Additionally, there is a concern that a shorter settlement cycle might contribute to an increase in market volatility.

“SEBI's T+0 trade cycle settlement introduces significant advantages for investors. Primarily, it will enhance liquidity and flexibility, empowering investors with prompt access to funds and the ability to respond swiftly to market dynamics. This agility is particularly beneficial during volatile market conditions or when rapid decision-making is imperative,” said Suman Bannerjee, CIO, Hedonova. 

Furthermore, T+0 settlement mitigates counterparty risk and enhances overall market efficiency by optimising the trade settlement procedure. As a result, it holds the promise of bolstering investor confidence and augmenting market liquidity, added Bannerjee.