The much-awaited T+0 settlement is finally here. The Indian stock market is poised for a significant transformation with the introduction of same-day settlement.

Traditionally, Indian exchanges followed a T+2 settlement cycle, meaning trades were settled two business days after execution. This was shortened to T+1 in January 2023 starting in a phased manner from January 2022.

The market is now moving to same-day settlement of trades, within a year of fully implementing the T+1 cycle. ‘

T+0 settlement offers a paradigm shift – trades are settled on the same business day they are executed, and the sellers will receive the money on the same day the trade is executed.

This eliminates the counterparty risk associated with the traditional settlement cycle and unlocks a range of benefits for both brokers and investors, as it also means increased trading and investment opportunities.

It enables investors to reinvest capital in other opportunities without having to wait for the settlement cycle, boosting portfolio liquidity and agility.This, of course, spells good news for the broker community and exchanges alike, as higher volumes would mean a boost to the revenues. For the retail investor, the process of trading and investments is becoming easier in the long run.Of course, investor awareness and education to trade and invest responsibly will require additional thrust by all stakeholders.

This transition involves significant adjustments to trading infrastructure for brokers and the completion of requisite approvals and procedures for foreign portfolio investors trading across different time zones.

Institutional investors, particularly FPIs (foreign institutional investors) may find it difficult to adapt to the change. The move to the T+1 settlement itself was not without challenges for them, and the introduction of the T+0 settlement will bring up uneasiness in the air.

The possible challenges that one can visualise are liquidity fragmentation and bifurcation of the markets. There could be two ongoing settlement cycles from Thursday:

T+0 and T+1, and this may lead to pricing discrepancies. With a diverse mix of participants and liquidity profiles, one segment may trade at a premium/discount to the other resulting in a divergence in the price of securities.

According to the Securities and Exchange Board of India, the price in the T+0 segment will operate with a price band of around 100 basis points from the price in the regular T+1 market. It added that this band will be recalibrated after every 50 basis points movement in the underlying T+1 market.

As the transition from T+2 to T+1 settlement unfolded, numerous foreign portfolio investors (FPIs) were able to maintain their existing trading and settlement procedures, albeit with extended deadlines from their brokers and custodians.

However, the shift from T+1 to T+0 settlement necessitates a comprehensive revamp of the trading and settlement protocols for FPIs engaged in global trading across multiple markets which may result in more usage of Central Bank Digital Currency (CBDC) blockchain and e-Rupee or Digital Rupee mechanism for making payment, and many of these are just about contemplating a move to T+1 settlement.

Additionally, banks, brokers, and custodians serving these FPIs will also need to adapt their operations to accommodate the accelerated settlement timeline.

But then, adapting to this change is the need of the hour and inevitable. It is commendable that India is among the first markets globally to introduce such a mechanism and the regulator deserves applause for moving forward on the trajectory in time.

The success of T+0 hinges on strong collaboration between brokers, stock exchanges, and the regulatory body. It marks a watershed moment in the evolution of the Indian stock market.

This bold initiative promises to enhance market efficiency, reduce settlement risks, and bolster investor confidence.

While the initial rollout may demand some adjustment issues, it has the potential to transform the market into a more efficient, agile, and investor-centric ecosystem.

(The author of the article is head – operations, Mirae Asset Capital Market)

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