Navigating Change: The Impact of T+0 Settlement Cycle on India’s Stock Market

In a groundbreaking move for the Indian stock market, the Securities and Exchange Board of India (SEBI) has announced an expansion of the optional T+0 settlement cycle. Initially introduced in March 2024, this innovative mechanism allows investors to receive shares in their accounts on the same day a trade is executed. With the recent decision to increase the number of eligible stocks from just 25 to the top 500 based on market capitalization, the potential for greater participation in this settlement cycle has piqued the interest of market observers.

The T+0 settlement cycle, which facilitates immediate crediting of shares and funds following a transaction, has positioned India as a pioneer among leading economies. However, despite this ambitious initiative, many brokers and market participants remain cautious about its long-term viability. They argue that the transition from a traditional T+1 settlement cycle to T+0 may not be as seamless as anticipated, with several challenges still on the horizon.

One of the primary concerns revolves around how the T+0 cycle will affect intraday trading, which has been a staple for many investors. Historically, traders have not relied on same-day settlements, and if the T+0 settlement becomes mandatory, it could significantly reduce the volume of intraday trades. This reduction could negatively impact brokerage firms that depend on high turnover for profitability.

Trivesh D., Chief Operating Officer at Tradejini, has articulated a fundamental apprehension regarding the T+0 cycle. He notes that the option for brokers to charge differential brokerage fees for T+0 transactions may not resonate well in a price-sensitive market like India. Given the established preference for the T+1 settlement due to its lower costs, the transition to T+0 may face significant resistance from clients.

Moreover, Samir Shah, head of online business at Axis Securities, emphasizes that the anticipated uptake of T+0 has yet to materialize. He cites several factors that discourage investors from opting for same-day payouts, such as lower expected returns and delays in fund deposits, even when the funds are credited to their ledgers by the end of the day. This lag can deter clients who expect swift access to their capital.

The operational costs associated with implementing T+0 are another significant hurdle. Market intermediaries, including brokers, will need to overhaul their systems to accommodate the new settlement cycle. These additional costs may result in increased brokerage fees, further complicating the transition for investors who are already navigating a challenging market landscape.

Despite these challenges, there is a consensus that T+0 could enhance liquidity in the market if implemented effectively. Foreign portfolio investors (FPIs), for instance, may find the T+0 platform appealing as it allows them to access their funds immediately. This immediate liquidity could position traditional stock exchanges as competitive players against cryptocurrency platforms that already offer instant transactions.

Ashish Rathi, a full-time director at HDFC Securities, notes that while T+0 does not guarantee immediate settlements, it aligns the stock market more closely with the rapid transaction capabilities of cryptocurrency trading. This alignment could attract a new wave of investors seeking faster and more efficient trading experiences.

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Discount brokerages may be less affected by the introduction of T+0. Tejas Khoday, co-founder and CEO of FYERS, points out that many discount brokerages have already been collecting payments upfront on the day trades are placed. For these firms, managing cash flows under the T+0 system will not pose significant challenges. However, operational or technical issues may arise if there are delays in settlements, necessitating careful planning to avoid disruptions.

In light of these developments, it is crucial for the broader ecosystem to adapt to the T+0 settlement cycle. As SEBI mandates that qualified stock brokers (QSBs) establish the necessary systems to facilitate this transition, a minimum threshold of active clients will be required for brokers to qualify for participation in T+0 trading. This initiative underscores the importance of client engagement and system readiness in ensuring the success of the T+0 settlement cycle.

The long-term implications of T+0 for the Indian stock market remain to be seen. While it presents an opportunity for increased efficiency, reduced short deliveries, and a streamlined settlement process, the effectiveness of its implementation hinges on addressing the concerns raised by market participants. The transition will require a concerted effort from brokers, regulators, and investors alike to navigate the complexities involved.

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In conclusion, the introduction of the T+0 settlement cycle by SEBI represents a significant step toward modernizing the Indian stock market. While the potential benefits are promising, the challenges ahead necessitate careful consideration and strategic planning. As stakeholders adapt to this new paradigm, the evolution of the T+0 settlement cycle could redefine trading dynamics in India, paving the way for a more efficient and responsive financial ecosystem.