Enhancing Efficiency in the Trading Process: Indian Economy and Market


After a successful year of implementing the T+1 settlement, it has shown high levels of operational effectiveness. Recently, SEBI has introduced a new option for clearing and settling funds and securities on the same day (T+0) in addition to the existing T+1 settlement cycle. According to theĀ T+0 system, trades will be settled on the day of the transaction after the market closes. This means that when investors sell a share, they will receive the money on the same day in their account, and the buyer will receive the shares in their demat account on the day of the transaction.

The implementation of T+0 settlement is advantageous for small-scale investors, especially those with limited funds. This new system allows sellers to immediately receive 100% of their cash on the transaction day, removing the necessity to wait for the remaining amount the next day.

The implementation of a shorter settlement cycle requires major modifications to trading infrastructure, including exchanges, brokers, banking, and depository systems. Collaboration between these entities is crucial in order to facilitate smooth transfers of cash and shares. It is also important to obtain necessary approvals and complete procedures for foreign portfolio investors, who operate in different time zones and deal with the complexity of forex transfers.

The BSE and NSE commenced trading in the beta version of the T+0 settlement cycle in the equity segment on March 28, 2024, as an optional service, following the guidelines provided by SEBI for implementing a shorter settlement cycle. The T+0 cycle will operate alongside the existing T+1 cycle. The market is currently debating the possibility of transitioning to same-day settlement within a year, after fully adopting the T+1 cycle. Under the current T+1 system, sellers are only able to access 80% of their cash on the day of sale, with the remaining 20% becoming available the following day.

The BSE’s same-day settlement mechanism now includes twenty-five companies, such as Ambuja Cements, Ashok Leyland, Bajaj Auto, Bank of Baroda, Bharat Petroleum Corporation, Birlasoft, Cipla, Coforge, Divi’s Laboratories, Hindalco Industries, Indian Hotels Company, JSW Steel, LIC Housing Finance, LTI Mindtree, MRF, Nestle India, NMDC, Oil and Natural Gas Corporation, Petronet LNG, Samvardhana Motherson International, State Bank of India, Tata Communications, Trent, Union Bank of India, and Vedanta. On the initial day of this new system, 63 members chose to participate in the optional segment, with 41 trading in the stocks of 10 companies. They collectively placed 329 orders, resulting in 90 trades. In total, 49 distinct investors utilized the facility on March 28th.

What is the significance of the T+0 Trading Settlement Cycle?

The Securities and Exchange Board of India (SEBI) put forth a new option in December 2023 for the settlement of funds and securities on the same day (T+0), in addition to the current T+1 settlement cycle. Under this new system, trades would be settled on the same day at the close of the T+0 market. This means that when investors sell a share, they would receive the money credited to their account on the same day, while the buyer would also receive the shares in their demat account on the day of the transaction. If implemented, this system would become the world’s fastest stock settlement system.

The current trading system, T+1, has a one-day gap between executing a trade and completing the settlement process. Under this system, sellers receive 80% of their cash on the day of the sale, and the remaining 20% is accessible the next day. The introduction of the new T+0 settlement system would allow sellers to immediately access 100% of their cash on the same day of the transaction, eliminating the need to wait until the following day for the remaining portion.

The T+0 settlement cycle will consist of two stages. During Phase 1, transactions made before 1:30 pm will be eligible for settlement and must be completed by 4:30 pm. Phase 2 trading will commence at 1:30 pm and end at 3:30 pm, replacing Phase 1. A price band of -100 basis points from the standard T+1 market price will be enforced, with the possibility of recalibration after every 50 basis point change. The computation of the index and settlement price will not be affected by T+0 pricing.

A Concept That Is Truly Valuable

The adoption of this initiative is a significant step towards the global implementation of same-day settlement for equity trades. Despite this, some brokerages have not yet implemented this service. SEBI will evaluate the progress after three and six months to determine the next course of action. The transition to a shorter settlement cycle will require significant modifications to the trading infrastructure, which includes exchanges, brokers, banking, and depository systems. Cooperation between these entities is vital to ensure smooth transfers of cash and shares. It is also crucial to obtain necessary approvals and complete procedures for foreign portfolio investors, who operate in different time zones and face the added complication of forex transfers.

Moving from T+1 to T+0 settlement may appear to be a minor change, yet it can have a significant impact on expenses. T+0 settlement would expedite the release of brokers’ funds, leading to a decrease in overall operational costs and creating a more robust and risk-aware market atmosphere. This shift not only enhances operational efficiency and adaptability, but also greatly reduces transactional risks, resulting in immediate advantages for traders and investors. By shortening the settlement cycle to T+0, investors can trade larger volumes of shares using the same pool of funds. Additionally, the regulator has stated that T+0 is just the initial step towards achieving instant settlement, hinting at a broader evolution in the market’s future.

The adoption of shorter settlement cycles, such as T+1 or even T+0, offers many obvious advantages. The efficiency of settlement is measured by SEBI using the delivery versus payment (DVP) ratio, which indicates the rate of errors in settlement. Prior to implementing T+1, the DVP ratio remained at 0.7-0.8%. However, after the change to T+1, this ratio has decreased by half to 0.3-0.4%. This significant improvement indicates a much smoother and more effective process in securities market transactions after the implementation of T+1.

The concept of T+0 settlement may appear complex to the ordinary trader or individual investor, but its benefits are apparent, especially for those seeking instant access to funds. T+0 settlement offers significant advantages for retail investors, particularly those with restricted funds. This alteration has the capability to revolutionize the trading environment for small investors by ensuring optimal utilization of funds, enabling them to capitalize on timely profits, especially for swing trading.

The risk exposure for retail investors can be significantly reduced by transitioning to shorter settlement cycles. This is achieved by allowing same-day access to funds and securities, resulting in a decrease in counterparty and duration risks. Although it may require some time to observe the complete effects of the shorter settlement cycle, it is undeniable that the T+0 mechanism is advantageous for all participants in the Indian capital markets.

Reducing the duration of the settlement cycle results in improved cost and time effectiveness, increased visibility into investor fees, and reinforces risk management for clearing corporations and the securities market as a whole. This change enables smoother and quicker transactions, reducing the amount of time that investors’ funds are held and improving market liquidity. As a result, the adoption of shorter settlement cycles, especially T+0, is a major development for the Indian capital market. It not only enhances efficiency, but also promotes transparency and risk management, benefiting all stakeholders, from individual investors to clearing corporations.

The T+0 system has the potential to improve liquidity and reduce counterparty default risks, which can greatly benefit individual investors. A research carried out by SEBI revealed that before the implementation of the T+0 system, approximately 94% of equity trades valued at less than 1 lakh were settled with pre-deposits of securities and funds. This suggests that faster settlement can greatly benefit a large number of small traders. T+1 settlement has been in operation for a little over a year and has already shown impressive operational efficiency.

Transitioning from a T+1 to a T+0 settlement cycle eliminates any buffer in the transaction process, which involves multiple parties. This change requires a seamless real-time connection between servers at stock exchanges, depositories, and the banking system. Any issues with this infrastructure can result in unintentional technical failures if there are delays in stock or cash transfers. Brokerages and FPIs incur additional expenses as they must invest in redundancies and upgrades to accommodate T+0. Operating two settlement systems simultaneously will inevitably lead to price differences, requiring arbitrage. While this offers opportunities for algorithmic traders, it also involves addressing technical aspects such as standardizing margin reporting, risk management, and settlement guidelines. While T+0 theoretically reduces default risks and enhances liquidity, its implementation is intricate, and the regulator’s gradual approach is wise.

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