T+0 Settlement Cycle and its Impact

The Securities and Exchange Board of India (SEBI) is working to implement the T+0 settlement system in the Indian Stock Market by March 2024, Said Sebi chief Madhabi Puri Buch.

It's like instant trading magic! In this blog, we'll break down what SEBI's plan is all about, how it will benefit those people who trade, and what cool changes we can expect. Get ready for a new settlement cycle of trading in the Indian stock market!

Currently, India is following the T+1 settlement cycle which means that when you buy or sell a stock, you will have to wait one business day after the trade execution.

In March next year, investors will be able to trade with a same-day settlement cycle in the cash segment. This means when you buy or sell stocks in the Indian stock market, the shares or money will be in your account on the same day.

Let’s understand the history of the Indian stock market settlement cycle

Before we get into the details of SEBI's plan for T+0 settlement, let us understand the history of Indian stock market settlement.

Initially, it took a long T+14 settlement days before 1992. Due to the Harshad Mehta scam, the process became faster and reduced to T+7 settlement. In December 2001, the T+5 settlement cycle was introduced. By April 2002, it became T+3, and in 2003, SEBI made it T+2.

Finally after 20 years, in January 2023, India transitioned to a T+1 settlement. Now, another big change is on the horizon. SEBI plans to introduce a T+0 settlement in March 2024. This move is expected to revolutionize the stock market, making trade settlements happen in real-time and creating a smoother trading experience.

India will soon become the first country with the implementation of the T+0 settlement cycle, surpassing even China's T+1 settlement, while European and USA markets settle in T+2. The USA plans to move to a T+1 settlement by May 28, 2024.

How the T+0  settlement cycle will benefit Indian Investors?

Increase Liquidity

Shifting to the T+0 settlement brings a significant advantage of boosting market liquidity because it makes it easier for investors to quickly sell their stocks and turn them into cash on the same day. This results in more money flowing into the market, making it more liquid.

Reduced Counterparty Risk

T+0 settlement will mitigate the counterparty risk that investors encounter in the event of default or delay by the counterparty. Therefore, the shorter the settlement cycle, the shorter the time between trade execution and settlement, reducing the risk of counterparty default.

Transparency and Efficiency

Instant trade settlement will also help improve the efficiency and transparency of the Indian stock market by minimizing the time gap between executing a trade and settling it.

Availability of Margin

With T+0 settlement, traders can use their margin faster because they don't have to wait for trades to settle before making new ones. This could result in more trading volume and liquidity.

According to a SEBI analysis, investors gained approximately ₹700 crore annually when transitioning from a T+2 settlement cycle to a T+1 settlement cycle. This was due to the faster margin release for one trade with the shorter settlement cycle, allowing the same funds to be used for another transaction.

So how this will affect the market participants?

Foreign Institutional Investors (FIIs)

FIIs could see their currency conversion costs rise due to the upcoming T+0 settlement system. Since India only accepts rupee investments, FIIs will be required to convert their foreign currency holdings into rupees daily, which could raise their transaction costs.

Clearing corporations

Clearing corporations hold a pivotal role in facilitating the seamless settlement of trades. The shift to T+0 brings added challenges for these entities, demanding an accelerated processing of trades. To meet this demand, clearing corporations must invest in advanced technological infrastructure, robust risk management systems, and a proficient workforce.

Why is India leading the way in adopting the T+0 settlement cycle, while China and the USA are not making the move yet?

India is set to be the first to adopt the T+0 settlement cycle, and there's a reason for it.

And the reason is the size of the markets and transaction volume.

Even though India has a similar number of trades as the US, the turnover in India is lower, making it easier to process settlements faster. India has advanced digital infrastructure and a real-time payment system, making it a perfect fit for T+0 implementation.