In the year 2003, the Securities and Exchange Board of India (SEBI) pushed for a reduction in the settlement cycle from T+3 days to T+2 settlement. This not only reduced the time taken for the shares and money to get credited into investors’ accounts, but also helped infuse some much needed liquidity in many stock counters.
And on account of a massive increase in the technological capabilities of stock brokers, depository participants, stock exchanges, clearing corporations, and other entities, SEBI is now planning to introduce the T+1 settlement cycle by February, 2022.
Going by this trend, can this settlement cycle be further reduced to T+0 days a few years from now? This question is exactly what we’re going to address in this article.
Leaving intraday trading in stock markets aside, at present, the Indian stock market is following a T+2 settlement cycle. This effectively means that any shares that you buy on a given trading day will only be credited to your demat account two business days after the transaction day. And similarly, the money that you receive upon selling shares on a given trading day can only be withdrawn by you two business days after the transaction day.
While this T+2 settlement cycle has been the norm ever since 2003, the Securities and Exchange Board of India came out with a notification in September, 2021.
According to this, the T+1 stock market settlement provision will be introduced on a phase-by-phase basis, with the bottom 100 of the stocks (on market-cap basis) listed on both stock exchanges first getting this treatment. And from March, 2022, the bottom 500 stocks (on market-cap basis) will be moved to the T+1 settlement cycle, while the rest of the stocks will be moved by October, 2022.
As per the T+1 settlement cycle, the shares and the money that you’re supposed to receive will be credited to you within just one business day from the transaction day. The reduction of a day in the settlement cycle is a huge leap forward since it would quicken the process of stock market settlements considerably.
If T+1 settlement goes smoothly, can we ever get to see T+0 stock market settlement provision in India? The answer to this question is not very simple.
Although the movement from T+2 to T+1 might just seem like the reduction of just a single day, it has huge ramifications for all the entities involved in the settlement process - stock brokers, depository participants, stock exchanges, and clearing corporations.
This move from T+2 to T+1 is likely to test the limits of speed and efficiency in settlements. Taking this into consideration, hoping for a T+0 settlement, where the shares and the money is credited to your accounts and available for use on the same trading day may not see the light anytime soon.
Also, unlike bank transfers, where instant and same day fund transfers can easily be made a reality due to the asset being transferred being the same across accounts, the same cannot be said for stocks. The stock market involves both stocks and money being interchanged between two parties, with several entities playing the middlemen.
That said, ruling out the possibility of T+0 settlement in the Indian markets may also not be a wise move. Back in 2003, many investors would have been sceptical when SEBI introduced T+2 settlements. However, as you can see, till date, we’re still following the same cycle without any issues whatsoever.
So, maybe a couple of decades down the future, we may even see T+0 settlement cycles in the Indian markets. But for now, it remains to be seen how the T+1 cycle is implemented.