T+0 Settlement Begins Today: Here's How it Impacts You!

Starting today, India's stock market is introducing the same-day transaction settlement system known as "T+0." This system allows for transactions to be settled on the same day they occur, making India one of the few countries to adopt this shorter trade settlement cycle. Initially, a beta version will be rolled out to test the system's functionality before its full implementation

What is T+0 Settlement

In the T+0 system trades in shares are settled on the same day they occur. This means shares are promptly transferred to the buyer's account while funds are swiftly deposited in the seller's account. Contrastingly India has been operating on a T+1 cycle where trades are settled by the next day. A 'beta version' of the shorter settlement cycle will be initiated as a pilot project. This version allows exchanges to introduce the system on an optional basis alongside the existing T+1 cycle. Initially only 25 stocks will be eligible for same day settlement with a limited number of brokers offering this service.

Under T+1 sellers receive 80% of their cash on the day of sale with the remaining 20% delayed until the next day. With the proposed T+0 system sellers would have immediate access to 100% of their cash on the transaction day. T+0 settlement cycle will occur in two phases. In Phase 1 transactions made before 1:30 pm will be settled by 4:30 pm on the same day. Phase 2 starting at 1:30 pm and ending at 3:30 pm will handle any remaining transactions with Phase 1 discontinued.

India has gradually reduced its stock trade settlement cycle over the years, transitioning from T+5 to T+3 in 2002, then to T+2 in 2003. In 2021, Sebi introduced the T+1 system, which became the standard in 2023. Now, the regulator aims for instant trade settlement. While most markets worldwide still operate on a T+2 settlement cycle, the US plans to shift to T+1 on May 28. The European Union is also considering this change and observing its impact in the world's largest securities market. China offers T+0 settlement, while many other markets still use T+2.

Impact on Investors & Brokers

The transition to a shorter settlement cycle aims to enhance market dynamism. With funds available immediately upon selling liquidity is expected to improve enabling traders to optimize cash usage. Retail traders in particular stand to benefit as they gain access to funds for subsequent trading sessions without delay.

Brokers servicing retail clients anticipate a competitive landscape where efficiency in managing finances will be paramount. The shorter settlement cycle could reduce their funding requirements and expedite fund release from exchanges. However, operational challenges especially in trade reconciliation remain a concern during the initial phase.

Challenges for Institutional Investors

In the T+0 system institutional investors especially foreign funds may face hurdles. Unlike retail traders who deposit funds before executing trades, large funds operate differently. Same day settlement requires these investors to pre fund their accounts exposing them to currency risks. Brokers note that foreign investors must allocate funds at least a day in advance due to time zone disparities. This process involves intermediaries such as custodian banks, foreign exchange banks and brokers. When Sebi reduced the settlement cycle to T+1 from T+2 in 2023 overseas fund managers were among the most vocal opponents.

Stocks Eligible for NSE T+0 Settlement

Below are the 25 Stocks, that are starting today on the National Stock Exchange (NSE), implements the T+0 settlement cycle:

Starting today National Stock Exchange implements the T+0 settlement cycle for 25 stocks including MRF, SBI, Hindalco, Vedanta. Among the others are Ashok Leyland, Ambuja Cements, BPCL, Bajaj Auto, Bank of Baroda, Birlasoft, Divi's Laboratories, Cipla, Coforge, JSW Steel, Indian Hotels, LIC Housing Finance, Samvardhana Motherson International, LTIMindtree, Nestle India, ONGC, NMDC, Petronet LNG, Tata Communications, Union Bank of India, Trent

To Summarize

India's shift to T+0 settlement marks a milestone in its financial market evolution. While aimed at boosting market efficiency and investor confidence the transition may pose challenges initially. However, with careful implementation and adaptation the new system promises to benefit all stakeholders ushering in a more dynamic and responsive trading environment.