Sebi’s Shift towards the T+0 Settlement System
Introduction
Recently on 28th March 2024, India’s stock market-initiated T+0 settlement system which is world’s fastest stock settlement system. The same day transaction settlement i.e. T+0 is launched for a select few cash segment stocks. This settlement is particularly aimed at accelerating the trade settlement cycle.
Understanding different trade cycles
Trading cycle is the process through which shares comes to settlement in Indian stock market. There is a difference between the date of trading and the date on which the transaction actually settles. Trade date is the day when you execute buying or selling of a security, where as the date of settlement is the day when trades involving shares are actually settled with shares transferring into the account of buyer and funds into the account of the seller.
In July 2001, Securities and Exchange Board of India (SEBI) established the rolling settlement system, which replaced the fixed settlement cycle. Initially, certain scrips followed a T+5 settlement (5 business days from the trade date), as the system evolved the settlement cycle was moved to T+3 in April 2002 and further reduced to T+2 from April 2003. Further in 2021, T+1 was introduced by SEBI which later on became a norm in 2023. At present, on 28th march 2024, T+0 has been introduced by India’s stock market.[1]
What is T+0 settlement system?
As the name suggest, T+0 system means settlement of the share on the same day of the trade without any delays. Money and shares both will be quickly transferred into buyers & sellers account respectively by using this settlement system. This system aims to improve liquidity by enabling availability of funds at the earliest. Moreover, it would benefit traders and investors who wants to utilise funds and react to the market. The present system will help in optimal utilisation of the funds to make the best return possible. The system guarantees same day access to funds and shares which will further reduce the risk for retail investors.
There will be two stages to the T+0 settlement cycle. Phase 1 deals made up to 1:30 pm will be taken into account for the settlement, which must be finished by 4:30 pm. Trading will begin at 1:30 pm and last until 3:30 pm in the second phase and the first phase will be discontinued. Under T+1 settlement system, sellers receive 80% of their cash on the day of sale with the remaining 20% delayed until the next day. With the T+0 system, sellers would have immediate access to 100% of their cash on the transaction day.[2]
The NSE T+0 settlement started with 25 stocks which are MRF, Union bank of India, State Bank of India (SBI), Hindalco, Bajaj Auto, Ambuja cements, Bank of Baroda, Ashok Leyland, Cipla, Birla Soft, Bharat Petroleum Corporation ltd (BPCL), Coforge, Divi’s Laboratories, Indian Hotels, Hindalco Industries, JSW Steel, Nestle India, Oil and Natural Gas Corporation (ONGC), Tata Communications, Trent, Petronet LNG, LIC Housing Finance, LTIMindtree.[3]
SEBI makes sure to maintain transparency, fairness, and protection of the investors which encourages more numbers of buyers and sellers to trade. With this new settlement system India is trying to stay up to date by coming with new efficient innovations and boosting the competition in the market.
Challenges Ahead
No wonder this settlement system has its own share of benefits for traders, retailers and other stakeholders, but with benefits many challenges also arise. This T+0 settlement system is very new in the market, so before proceeding with this system one should do thorough research on their part to be sure about the procedures and to avoid any kind of problems which may arise later on. When any new system is introduced, they demand several changes which sometimes can be a burdensome, time consuming, complex and difficult to implement. We all are aware of how risky trading business can be sometimes, now as there will be shift to T+0 settlement system the investors need to stay more alert. People involved in the procedure of this trading will have to first learn about how it exactly works for smooth trading. They will have to be prepared to tackle the challenges which the present system may bring.
Moreover, Institutional investors may have difficulties with the current system, especially international funds. Large funds function differently than ordinary traders, requiring prior planning for same-day settlement and exposure to currency risks. International investors must set aside money in advance of trading and account for time zone differences. Intermediaries such as custodian banks, foreign exchange banks, and brokers are involved in the process. Smart risk management can be done to tackle with the challenges.[4]
Conclusion
India is a growing country with new innovations being introduced rapidly, T+0 settlement system is one of the most recent examples of it. The data of NSE showed that between 2019 and 2023, over 120 million investors were registered, and further alone in January 2024, 5.4 million more investors were added [5]. This proves that the current system is going to help many investors and other stakeholders of the stock market. Currently, India is in it’s digital era which helped many consumers to transform, learn new technologies, adapt & adopt to the new changes with the shift in the market. T+0 will benefit traders & stakeholders because seller will get the money and buyer will get his shares without any delays. However, usage of the appropriate technology can be challenging sometimes, including risks in the stock market business but it could be avoided by monitoring investments and reallocating assets carefully, and by using systematic risk management.
Author:- Waruni Tikmani, in case of any queries please contact/write back to us at support@ipandlegalfilings.com or IP & Legal Filing.
References
- https://www.business-standard.com/markets/news/stock-market-settlement-cycles-india-s-shift-from-t-2-to-t-1-explained-123080100560_1.html
- https://www.indiatoday.in/business/story/stock-market-same-day-settlement-t0-settlement-explained-for-retail-investors-2520201-2024-03-28
- https://timesofindia.indiatimes.com/business/india-business/what-is-the-t0-system-indias-stock-market-starts-worlds-fastest-stock-settlement-check-full-list-of-stocks-benefits-more/articleshow/108836956.cms
- https://www.businesstoday.in/markets/stocks/story/t0-settlement-is-finally-here-what-does-it-mean-for-investors-and-traders-423232-2024-03-28
- https://economictimes.indiatimes.com/markets/stocks/news/retail-investors-driving-indias-stock-market-surge-what-has-changed-over-the-years/articleshow/107742841.cms?from=mdr
