On 10 December 2024, the Securities and Exchange Board of India (SEBI) issued a circular appropriately titled, “Enhancement in the scope of optional T+0 rolling settlement cycle in addition to the existing T+1 settlement cycle in Equity Cash Markets”, focusing on enhancing market efficiency, reducing settlement risks and increasing liquidity. It aligns with India’s equity market practices to attract greater participation from investors and foster a more robust financial system.
This article explores the evolution of India’s settlement cycles, with a focus on SEBI’s introduction of the optional T+0 settlement system. It analyses the benefits alongside the operational challenges.
The T+0 Settlement Cycle
The evolution of the settlement cycles in India has caused significant changes to improve market efficiency and bring back investor confidence. Initially, the Indian Stock Market operated on a T+5 settlement system, which was susceptible to defaults and inefficient. In July 2001 the Securities and Exchange Board of India (SEBI) introduced the rolling settlement mechanism, which led to a transition to T+3 in April 2002 and subsequently to T+2 in April 2003. The shift was aimed at improving market liquidity and reducing risks linked with delayed settlements. By January 2023, the T+1 settlement cycle was adopted by India, enabling transactions to be settled one business day after execution, keeping in step with global market trends toward faster settlement.
The introduction of the T+0 settlement cycle, implemented on March 28, 2024, represents a pivotal shift towards same-day settlements. Under this system, the transactions completed before 1:30 PM are finalized by 4:30 PM on the same day, cutting down the waiting periods for investors and enhancing liquidity. This advancement not only mitigates the counterparty risks but also ensures immediate access to funds, thereby improving trading dynamics and efficiency.
The SEBI circular dated 10 December 2024, determines India’s commitment to aligning with global financial market practices. By embracing instant payment methods like the Unified Payments Interface (UPI), SEBI caters to the modern and evolving needs of modern investors. This initiative aims to increase financial engagement and reinforce market transparency.
Key Features of the Enhanced T+0 Settlement Cycle
SEBI’s circular dated 10 December 2024 enhances the Optional T+0 settlement cycle in India. Starting January 31, 2025, the phased approach will include the top 500 scrips initially based on market capitalization, beginning with the bottom 100 and adding another 100 companies each month until all top 500 are covered. This expansion aims to boost market liquidity and efficiency. All stock brokers are allowed to offer T+0 settlements with the flexibility to charge differential brokerage rates for T+0 and T+1 trades, provided they adhere to the regulatory limits. This flexibility will encourage broader market participation. Qualified Stock Brokers (QSBs) are further required to establish systems to ensure that their clients can participate seamlessly in the T+0 cycle.
A Block Deal Window has been introduced to cater to large trades efficiently exclusively for T+0 trades. This Block Deal Window will operate during the morning session from 8:45 AM to 9 AM, supplementing existing block deal windows for T+1 settlements. Transaction completed during this window will be settled on the same day, simplifying the trading process for significant transactions.
Implications for Market Participants
There are both challenges and advantages for both retail and institutional investors with the introduction of the T+0 settlement cycle. Same-day settlements allow investors immediate access to funds which allows for quick reinvestment and boosts liquidity. It enables investors to respond quickly to capitalize on market opportunities without delays in longer settlement periods.
Stock brokers have a key role to play, as they can charge different brokerage rates for T+0 and T+1 settlements. It may add complexity to the fee structures as this flexibility may encourage brokers to promote T+0 trades, potentially leading to competitive pricing requiring investors to carefully consider the costs and remain vigilant about the costs of various settlement cycles.
There remain operational challenges despite the advantages that brokers and market infrastructure institutions must navigate. The implementation of the T+0 settlement system requires robust technological infrastructure to handle same day transactions with ease. The increased volume of trade and faster settlement cycle may strain existing systems demanding operational adjustments. The T+0 cycle has the potential to significantly enhance the efficiency and liquidity. However, its success depends on the effective addressing of the operational hurdles.
Global Context and Comparative Analysis
With the shift towards the T+0 settlement cycle, India is placed at the forefront of global financial markets. Many countries including the United States and the European Union continue with the T+1 or T+2 cycles, India has taken a bold step by implementing the T+0 cycle allowing transactions to settle on the same day. Similar rapid settlement practices have also been explored by South Korea.[1] Regulatory bodies across the world are reducing settlement times to minimize counterparty risks. The T+0 adoption not only upgrades India’s trading infrastructure but also fosters a more competitive environment, prompting other markets to reevaluate their frameworks.
Conclusion
The introduction of the optional T+0 settlement cycle marks a transformative step in India’s equity markets, which aims at improved liquidity and operational efficiency. Extending this option to the top 500 scrips by market capitalization in a phased manner that begins with the bottom 100 companies and adds 100 more each month. This approach ensures maximum participation from brokers to custodians and includes provisions for Qualified Stock Brokers (QSBs), thereby fostering greater participation across the board.
Looking ahead, the future of the T+0 settlement cycle in India could pave the way for further innovations, such as an extension of this model to a broader range of scrips and exploring instant settlement mechanisms. Stakeholders’ feedback will play a crucial role in shaping these developments as SEBI continues to highlight its commitment to a collaborative and adaptive regulatory framework. Regulatory fine-tuning will likely aim to optimize trading practices and strengthen investors’ interests as participants adapt to these changes.
In conclusion, the T+0 settlement cycle initiative has the potential to reshape the equity trading landscape in India by providing immediate liquidity and mitigating risks tied to delayed settlements. It signals a progressive leap in the domestic financial ecosystem and also enhances the country’s attraction of more investors and capital into its markets.
Notes:
[1] https://www.clearstream.com/clearstream-en/securities-services/market-coverage/asia-pacific/south-korea/settlement-process-south-korea-1283572
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