Sebi's T+0 settlement cycle: Here's how the rule can be beneficial

Madhabi Puri Buch, the first woman chief of India’s capital markets regulator, the Securities and Exchange Board of India (Sebi), is not known for pulling punches. If proof was needed of that trait, there was her speech at the CII Corporate Governance Summit on April 2.

“There was a time when we, as Indians, used to sit in the last row of global forums. Today we sit centre stage… People turn to India and ask us for guidance and advice. We sit there as panellists in discussions. We are not in the last row. We are sitting in centre stage, receiving awards and giving guidance to the rest of the world on how we have implemented cutting-edge technology.”

That statement came less than a fortnight after Sebi approved the T+0 settlement cycle for stocks, a global first, and four days after a select set of 25 stocks went live with the facility on March 28, in the process putting the Indian equity market at the forefront of innovation in financial regulation.

“Our T+0 was itself a global first; there was no other large market that had implemented it,” she had said.

T+0 refers to a mechanism wherein the shares or the sale proceeds of the shares—depending on whether it is a buy or sell transaction—are credited to the demat or the bank account on the day of the transaction. For other stocks, the credit occurs the day after the transaction, or T+1.

The 25 companies whose shares are now available for trading on the BSE as part of the same-day settlement mechanism are: 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, LTIMindtree, MRF, Nestlé 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 first day, 63 members participated in the optional segment on BSE with as many as 41 trading in shares of 10 companies, placing a total of 329 orders, resulting in 90 trades. A total of 49 unique investors used the facility on March 28.

Though it may appear to be just an incremental step from T+1 to T+0, the impact of just a day’s reduction can be significant in terms of costs. “T+0 settlement would help free up brokers’ own funds within the system, thus reducing the overall cost of doing business,” says Shrey Jain, founder and CEO of discount stockbroking firm SAS Online.

In a similar context, Vamsi Krishna, CEO of online trading platform StoxBox, believes that T+0 will pave the way for a stronger, risk-averse, and dynamic market ecosystem. “The transition towards T+0 not only enhances the efficiency and flexibility of market operations but also stands to substantially mitigate transactional risks, offering immediate and tangible value to both traders and investors alike,” says Krishna.

Indeed, the benefits could be significant for investors, as they can trade in a much larger quantity of shares from the same pool of funds if the settlement cycle is shortened. Incidentally, the regulator has already made it clear that T+0 is just a step towards achieving its larger goal of moving to instant settlement.

And the benefits of moving to shorter settlement cycles are already becoming apparent. Buch said in her April 2 speech: “We measure the defect rate of settlement with the DVP ratio, or the delivery versus payment ratio… Prior to T+1 (settlement cycle), the DVP ratio was 0.7–8%. After T+1, the ratio has halved to 0.3-0.4%. So, the entire process (of a securities market transaction) has become far more optimal and efficient after T+1.”

While these metrics might sound technical to the average trader or retail investor, there is no denying the fact that T+0 would be beneficial for investors that are looking for immediate liquidity.

“I feel this could be highly beneficial to retail [investors] who come with limited cash into the market, and this would revolutionise the trading landscape for the same small investors,” says Prashanth Tapse, Senior VP (Research), Mehta Equities.

“Shortening of the settlement cycle means optimal utilisation of funds to make best-in-time returns to swing traders. This shift will substantially reduce the risk exposure for retail investors, and the system guarantees same-day access to funds and securities, thereby mitigating counterparty and duration risks,” adds Tapse.

Though it may take some time for the real impact of the shorter settlement cycle to become apparent, there is no denying that the T+0 mechanism is a win-win for all stakeholders in the Indian capital markets.

Like Sebi has said, “A shortened settlement cycle will bring cost and time efficiency, transparency in charges to investors, and strengthen risk management at clearing corporations and the overall securities market ecosystem.”

@ashishrukhaiyar