Securities and Exchange Board of India (SEBI) is set to introduce T+0 trade settlement cycle from March 28, Chairperson Madhabi Puri Buch said on Monday. The regulator has decided to roll it out on an optional basis.
Indian stock market currently operates on a T+1 settlement cycle. Under the new regime, trades made till 1:30 pm will be settled on the same day. This means that the transaction will reflect immediately in the accounts of investors.
Buch had said last year that the regulator wanted to implement the plan by the end of financial year 2024. The T+0 settlement cycle will be executed in two phases. In the phase 1, trades taken till 1:30 pm will be considered for the settlement which needs to be completed by 4:30 pm.
The second phase will see trading time extend till 3:30 pm and the first phase will be discontinued. Top 500 stocks by market capitalisation will be eligible for the new settlement cycle which will transition in three tranches of 200, 200 and 100.
SEBI has been working to smoothen the settlement cycle amidst the rising interest of retail investors in the stock markets. India has seen the number of demat accounts grow from 4 crore in 2020 to 14.39 crore in January 2024.
In January 2023, India shifted to a T+1 settlement cycle for all the top listed securities. The National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) had started implementing the plan from February 2022. In the T+1 system, trades are settled within 24 hours. Now, the country has started its shift towards an instantaneous settlement system.
How T+0 Cycle Will Impact The Stock Market and Investors
The clue to how the new shift towards same day settlement will impact investors and market lie in the impact of the previous change to T+1. According to a SEBI analysis, investors gained Rs 700 crore annually due to the change from T+2 to T+1.
The reason cited for the gain was the ability of investors to use the freed up capital from one transaction in another trade. With instant settlement, the liquidity on the hands of investors is expected to receive a boost.
Dr VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services, said, "Moving to T+0 will improve liquidity since cash is made available on the same day of trade. This will enhance market efficiency."
In the consultation paper on T+0 settlement cycle released in December 2023, the regulator had noted the need to reform the market.
"The significant evolution of payment systems in the country in recent years coupled with sophisticated and robust technologies used by Markets Infrastructure Institutions (MIIs) appears to present further opportunities for advancing the clearing and settlement timelines, on an optional basis," the paper said.
Brokerage firm Angel One said in a note on its website that the T+0 settlement cycle will boost liquidity and trading volumes. Another benefit of the shift will be that the possibility of a counterparty defaulting before the trade settles.
However, experts cite some challenges too. Instant settlement would mean that the technologies of depositories will have to be enhanced significantly to manage the inflow and outflow of funds.
CA Rakeshh Mehta, Chairman of Mehta Group, said that caution needs to be kept in mind. "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."
