SEBI to beta test T+0 settlement — what it means for you

• Moving to T+0 will improve liquidity since cash is made available on the same day of trade
• The initiative of T+0 settlement would help all types of investors in reducing counterparty risk
• Brokerages will need to adapt to the new regulations as they often rely on interest earned from holding client funds

Sebi has announced the introduction of a framework to introduce the T+0 settlement cycle on an optional basis.

Contingent on deliberations and approval of the Board, SEBI has put in place a framework for the introductory Beta version of the T+0 settlement cycle on an optional basis, the agency said in a circular. The version will be to a limited set of 25 scrips and with a limited number of brokers. This will be in addition to the existing T+1 settlement cycle in the equity cash market.

What is the T+0 cycle?

Imagine "T" as a trade day. In a T+1 settlement, if you buy a stock on Monday, it settles (funds move, stock arrives in your account) by Tuesday (T + 1 day). This is the current system in many markets.

T+0 settlement speeds things up. Stocks and funds exchange on the same day (T + 0 days) of the trade. This means buying on Monday implies you own the stock and have the money by Monday's end, potentially increasing liquidity and trading options.

“The introduction of T+0 settlement is seen as a positive development for investors, providing them with greater flexibility and control over their assets. This increased control over assets can also lead to better risk management and more informed investment decisions for them,” says Trivesh D, COO at Tradejini, an integrated broking platform.

Benefits for investors

If settlement times were faster, investors could access their funds and securities sooner after making a trade. This would boost liquidity, enabling them to reinvest their earnings or seize new opportunities more promptly. This could particularly benefit day traders or those seeking to capitalise on short-term market fluctuations.

“The initiative of T+0 settlement would help all types of investors in reducing counterparty risk as the buyer have to provide fund and seller have to provide security before placing the order, and strengthen investor protection,” says Abhishek Kumar, founder and chief investment advisor at SahajMoney, a financial planning firm.

However, T+0 is a double-edged sword. It empowers investors but demands a learning curve for brokerages.

T+0 will shorten the float period which potentially will squeeze the traditional revenue stream for brokerages. “They will need to adapt to the new regulations as they often rely on interest earned from holding client funds. Additionally, brokerages will have to invest in upgrading systems and potentially explore new business models,” says Trivesh.

On paper, T+0 is a game changer for Indian investors, offering them faster access to funds and securities. While there will be a few systemic pains, a well-implemented T+0 can significantly enhance the Indian stock market's dynamism and efficiency.