
India is on the verge of a revolution in its stock trading sector thanks to the introduction of the T+0 trade settlement cycle. The Securities and Exchange Board of India (SEBI) has announced that a beta version of same-day business settlement will be implemented for a select group of stocks and brokers. This move positions India as the second country, after China, to adopt such a swift settlement cycle, in contrast to the two-day period commonly used in other major economies.
Anticipated Advantages of T+0 Trade Settlement
The transition to T+0 trade settlement is expected to bring several benefits. Rakeshh Mehta, chairman of Mehta Group – Mehta Equities, highlights that this change could significantly reduce counterparty risk and enhance market efficiency by facilitating quick exchanges between buyers and sellers. Additionally, the new system could significantly decrease operational costs for market participants and ease the funding expenses currently borne by brokers.
Shrey Jain, founder & CEO of SAS Online, suggests that T+0 settlement could release brokers’ funds within the system, thus reducing overall business expenses. Moreover, instant settlement is predicted to increase market liquidity by motivating investors to convert stocks into cash on the same day. This modification also aims to minimize the risk faced by investors in case of seller default or delay.
Challenges and Considerations
While the potential advantages of the T+0 settlement system are promising, its implementation will not be without challenges. Experts suggest that this change would require a substantial overhaul of existing market infrastructure, systems, and processes, which could be complex and potentially costly. There are also concerns that a shorter settlement cycle could lead to increased market volatility.
Aligning with International Financial Market Norms
The introduction of the T+0 settlement system represents a significant step towards aligning India with international financial market norms. Countries such as Russia, South Korea, Taiwan, and Hong Kong have already adopted this system for specific securities. Gagan Singla, MD of BlinkX by JM Financial, sees this move as an indication of India’s commitment to advancing its financial landscape.
Market Participants’ Outlook
As India prepares for the transition to T+0 settlement, market participants are cautiously optimistic. Atul Parakh, CEO of Bigul, emphasizes the need for proactive adaptation to the revised settlement timelines and protocols. Despite recognizing the complexities and challenges ahead, participants eagerly await the potential benefits of this system.
Assessment and Future Steps
SEBI plans to evaluate the progress of the T+0 settlement system after three and six months before deciding on subsequent steps. While it is too early to predict the long-term impact, market participants are closely observing whether this new system will prove advantageous and fruitful for India’s trading sector. SEBI aims to transition from the current T+1 settlement to an optional T+0 settlement, eventually allowing instant settlement within an hour of the trade.
Foreign Portfolio Investors’ Reservations
Despite the major advancement in India’s stock market, foreign portfolio investors have expressed reservations about the same-day payments regime. They believe that such a transition could lead to liquidity concerns. The Asia Securities Industry and Financial Markets Association (ASIFMA) warns that this decision could fragment market volumes due to the existence of two settlement cycles.
Understanding T+1 and T+0 Settlement
Currently, SEBI’s T+1 settlement process involves payment settlement within 24 hours of a trade, while T+0 settlement allows transactions until 4:30 pm on the same day. The initial launch of the same-day settlement involves optional T+0 settlement, which is expected to help institutions adapt to the shorter settlement cycle.